Liquidations

Introduction

Liquidation takes place when a borrower's health factor falls below 1, indicating that the value of their collateral no longer sufficiently secures their loan or debt. This situation can arise if the collateral's value diminishes or if the value of the borrowed debt rises in comparison. The ratio of collateral value to loan value, which determines this scenario, is reflected in the health factor.

If Hf < 1, then the position may be liquidated.

In a liquidation, up to 50% of a borrower's debt is repaid and that value + liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid.

How much is the liquidation penalty?

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral. Liquidiation Bonuses for each listed collateral can be found in Protocol Assets

Examples

Example 1:

Matthew deposits 10 BTC and borrows 5 BTC worth of USDT. If Matthew's Health Factor drops below 1.0, then his loan will be eligible for liquidation. A liquidator (or bot) can repay up to 50% of the asset (BTC in this case) equal to 2.5 BTC of USDT. In return, the liquidator can claim collateral (BTC) for a 5% bonus. The liquidator claims 2.5 BTC + 0.125 BTC for repaying 2.5 BTC worth of USDT.

Example 2:

Larry deposits 5 ETH and 4 ETH worth of BNB, and borrows 5 ETH worth of DAI. If Larry’s Health Factor drops below 1.0, then his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of DAI. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for BNB (10%) than ETH (5%) the liquidator chooses to claim BNB. The liquidator claims 2.5 + 0.375 ETH worth of BNB for repaying 2.5 ETH worth of DAI.

How can I avoid getting liquidated?

To prevent liquidation, you can enhance your health factor by adding more collateral assets or by repaying a portion of your loan. Typically, repayments contribute more significantly to increasing your health factor than deposits do. It's essential to regularly check your health factor and maintain it at a high level to circumvent liquidation. For instance, keeping your health factor above 2 provides a greater buffer against liquidation.

Additionally, be aware of the impact that market conditions can have on stablecoin price fluctuations and how they might influence your health factor. For instance, the market value of USDC 1.00 may not always equate to exactly USD 1.00 but could, for example, be USD 0.95. Like any other assets, these price variations of stablecoins can affect your health factor.

If you have any questions, please reach out to the Harbor team in our official discord: https://discord.gg/JQjh8U6NuZ