Liquidations
Introduction
Liquidation is the process that occurs when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt position. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.
In a liquidation, up to 35%(depending on the token) of a borrower's debt is repaid and that value plus liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your debt is repaid.
What is the health factor?
The health factor is the numeric representation of the safety of your deposited assets against the borrowed assets and their underlying value. The higher the value is, the safer the state of your funds is against a liquidation scenario. A Health Factor below 1 suggests that the collateral will enter liquidation phase.
The health factor depends on the liquidation threshold of collateral against the value of borrowed funds. You can find all of the collateral parameters in the Lending & Borrowing section. If you would like to know more technical details about the health factor calculation, please read more details here. We highly recommend to understand these parameters before conduct any borrow/lending activity.
For each wallet, these risks parameters enable the calculation of the health factor:
* Liquidation Threshold
The liquidation threshold is the percentage at which a position is defined as undercollateralized. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the position is undercollateralized and could be liquidated.
The delta between the LTV and the Liquidation Threshold is a safety mechanism in place for borrowers.
For each wallet, the Liquidation Threshold is calculated as the weighted average of the Liquidation Thresholds of the collateral assets and their value:
* Loan to Value
The Loan to Value (”LTV”) ratio defines the maximum amount of assets that can be borrowed with specific collateral. It is expressed as a percentage (e.g., at LTV=75%, for every 1 Sui worth of collateral, borrowers will be able to borrow 0.75 Sui worth of the corresponding currency). Once a borrowing occurs, the LTV evolves with market conditions.
* How much is the liquidation penalty?
The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral. Once the user is liquidated, he will pay a penalty in proportion as a reward to the liquidator. You can find out the parameters for each assets in Lending & Borrowing
* Liquidation Factor
The liquidation factor directs a share of the liquidation penalty to a collector contract from the ecosystem treasury.
What happens when my health factor is reduced?
Depending on the value fluctuation of your supplies, the health factor will increase or decrease. If the health factor increases, it will improve the borrow position by making the liquidation threshold more unlikely to be reached.
In the case that the value of collateralized assets against the borrowed assets decreases instead, the health factor is also reduced, causing the risk of liquidation to increase.
How do I avoid liquidation?
In order to avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more assets in order to increase your health factor. Out of these two available options, repaying the loan would increase your health factor more.
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