Liquidation

What is liquidation?

Loan liquidation is a process of loan termination. Typically, it can occur in two cases:
  • When the Health factor is 1 or below, the Lender can manually trigger Oracle Liquidation.
  • When the borrower fails to repay the loan before the deadline.
The Lender must have the specified L NFT bond, while the borrower must have the underlying B NFT bond to claim the remainder from the liquidation.

Oracle liquidation (the Borrower does not lose the entire Collateral)

When the user triggers Oracle liquidation (e.g., when the Health Factor has dropped to 1 or below 1) and claims the Collateral, the amount to be received is calculated by the Oracle.
Collateral_for_lender_in_ada=(loan_value_in_ada+interest_value_in_ada)+collateral_value_in_ada
Collateral_for_borrower_in_ada=all_collateral_in_ada - (loan_value_in_ada+interest_value_in_ada)
In the event of Oracle liquidation (e.g., the Health Factor has dropped to 1 or below 1), the Lender pays a Liquidation commission (1.6% of the Collateral). The Oracle gives the Lender only part of the Collateral to cover the loan + 1.6% as commission.

Liquidation due to loan maturity (the Borrower loses the entire Collateral)

When the Loan term matures, the Lender can liquidate the loan and claim the entire Collateral. Borrowers must repay their loans in time to avoid losing their Collateral.
Keep in mind that repaying a loan earlier results in paying smaller interest which does not cover TX fees.

Liquidate and swap

The difference between ordinary liquidation and the Liquidate and swap feature
The Liquidate and Collateral Swap functions allow users to swap the borrower’s collateral (ADA) for the initial token the lender has lent. In the event of a possible liquidation, the user can initiate the Liquidate function on the Dashboard tab.
The confirmation window gives the Liquidate and Swap option. Confirming the transaction results in swapping the collateral through a DEX and sending it back to the user’s wallet.

FAQ

1) Oracle fee (1.6 ADA)
The Oracle fee is a Liquidation fee rewarded to the nodes (1.6 ADA is split between nodes) for signing and verifying each transaction.
2) The loan counter starts 30 minutes after providing the loan
The Lender is given a 30-minute advance to sign the transaction before the Loan expiration time. After successfully funding the loan, the loan timer activates and begins the countdown.