Liquidations
What is a liquidation?
A liquidation is a process that occurs when a borrower's health factor drops below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.
This collateral vs loan value ratio is shown in the Health Factor section. 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 is the sword of Damocles hanging over the user's head. It is a punitive measure. Liquidation exists to protect the interests of lenders and the stable operation of the entire project. It is also a reminder for investors to grasp investment risks. During the liquidation process, the lender needs to pay a certain amount of penalty, and this part of the penalty will become the liquidator's bonus. This amount depends on the criteria of different collateral assets.You can find every assets' liquidation fee in the Risk Parameters section.
How do I avoid liquidation?
From the perspective of the borrower, being liquidated means paying a fine. Therefore, when using the PRET lending protocol, when borrowing encrypted assets, you need to control risk management, and do not have an excessive lending rate to prevent liquidation. To avoid liquidation, you can increase your health factor in two ways:
Increase mortgage assets and reduce loan assets.
Repay part of the loan to improve your health factor. In general, given the volatility of market conditions, repayment increases your health factor more than deposits.
Also, monitoring your health factors frequently and keeping them high to avoid liquidation is also an important tool. For example, keeping your health factor above 1.5 gives you more leeway to avoid liquidation.
Can I participate in the liquidations ecosystem?
Of course, everyone can participate. Liquidators are an under-discovered role in the DeFi space, working behind the scenes like miners and validators to keep the entire system up and running and get rewards for doing so. However, unlike miners and validators, liquidators do not actually require any up-front capital investment, creating an ecosystem of professionals that operate in complete anonymity anywhere in the world, keeping the market solvent, and thereby get paid. The mechanics and terms of clearing basically require the same components:
Bots that monitor outstanding transactions and find loans eligible for liquidation.
Decentralized exchanges that can be used to instantly sell liquidation collateral and guarantee liquidators a certain profit.
Smart contracts that allow the liquidation and sale of collateral to be executed automatically in a single transaction.
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