🚰Liquidation

How under-collateralized positions are handled — the single source of truth

Liquidation keeps the protocol solvent. When a borrower's collateral no longer sufficiently covers their debt, anyone may repay part of that debt in exchange for the borrower's collateral plus a fee. This protects lenders from default risk without credit checks or intermediaries.

This page covers the Fixed-Rate Lending Protocol. The USDFC Stablecoin Protocol uses a different mechanism (Stability Pool) — see USDFC Liquidation.

When does liquidation happen?

A position becomes liquidatable when its Loan-to-Value (LTV) ratio reaches the liquidation threshold (current value in Protocol Parameters — 80% at time of writing):

$$LTV = \frac{\text{Value of Debt}}{\text{Value of Collateral}} \times 100\%$$

Two situations push LTV up:

1. Collateral value falls — e.g. you borrowed USDC against ETH and ETH drops.

2. Debt value rises — e.g. you borrowed FIL against USDC and FIL rallies.

Positions are valued with Mark to Market pricing for ZC bonds and Chainlink oracle feeds for spot prices.

LTV and liquidation risk visualization

What happens during liquidation

1. A liquidator repays 50% of the outstanding debt — or 100% if the position has deteriorated past the full-liquidation threshold (≈ LTV 85%; see Protocol Parameters).

2. Collateral equal to the repaid debt plus the liquidation fee is transferred from the borrower. The fee — currently 7% total: 5% to the liquidator, 2% to the protocol's Reserve Fund (Protocol Parameters) — compensates liquidators and builds the protocol's safety buffer.

3. After a 50% liquidation, the position returns to a healthier LTV, typically around 70%. Past the full-liquidation threshold, the entire debt is closed out instead.

Worked example

Alice deposits 10 ETH ($20,000) and borrows 12,000 USDC (LTV 60%).

Event	Collateral value	LTV	Status
Entry	$20,000	60%	Healthy
ETH → $1,600	$16,000	75%	At risk
ETH → $1,500	$15,000	80%	Liquidatable

A liquidator repays 6,000 USDC (50% of debt). Collateral seized: 6,000 × 1.07 = $6,420 of ETH (4.28 ETH). Alice keeps 5.72 ETH against 6,000 USDC of debt — LTV back to ~70%.

More scenarios, including liquidation caused by the borrowed asset rallying: Liquidation Case Study.

How to avoid liquidation

• Watch the risk indicator in Portfolio — green → yellow → red as LTV climbs.

• Add collateral or reduce debt before the threshold — unwind the position, or place an opposite order for part of the amount (Managing Positions).

• Remember ZC bond prices move with rates — your debt's present value changes even when spot prices don't.

• Leave a buffer around quarterly Auto-Rolls, which restate positions at the roll price.

• The Base Price Adjustment mechanism sets minimum collateral requirements that rise as bonds approach par — factor it into long-dated borrows.

For liquidators

Liquidation is permissionless — any address or contract can liquidate an eligible position and earn the liquidator fee. See the Liquidator's Guide for the contract-level flow and a reference bot implementation.

In this section

• Mark to Market — how positions are valued

• Liquidation Case Study — full numerical scenarios

• Liquidator's Guide — running liquidations, technically