Liquidations

Introduction

Liquidation occurs when a borrower’s Health Factor falls below 1 because their collateral no longer sufficiently covers their borrowed debt. This can happen if:

• The collateral decreases in value, or

• The borrowed assets increase in value relative to the collateral.

During liquidation, up to 35% of the borrower’s debt (depending on the token) is repaid, and the equivalent value plus a liquidation fee is taken from the collateral.

What is the Health Factor?

The Health Factor is a numeric measure of how safe your positions are from liquidation:

• Higher Health Factor → safer position

• Below 1 → risk of liquidation

It is calculated based on:

• Collateral value

• Borrowed amount

• Liquidation thresholds

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.

Risk Parameters Safeguard Solvency

A wallet’s Health Factor is calculated using these risk parameters:

$H_f = \frac{ \sum{Supply_i \: in \: USD \: \times \: Liquidation \: Threshold_i}}{Total \: Borrows \: in \: USD}$

Liquidation Threshold

• Defines the point at which a position is considered undercollateralized.

• Example: 80% threshold → if debt reaches 80% of collateral value, the position can be liquidated.

• Safety buffer = difference between LTV and Liquidation Threshold.

A wallet’s Liquidation Threshold is determined by averaging the thresholds of all its collateral assets, weighted by their value:

$Liquidation \: Threshold= \frac{ \sum{Supply_i \: in \: USD \: \times \: Liquidation \: Threshold_i}}{Total \: Supply \: in \: USD \:}$

Loan to Value (LTV)

• Maximum percentage of collateral that can be borrowed.

• Example: LTV = 75% → 1 SUI of collateral allows borrowing 0.75 SUI worth of another asset.

• Evolves dynamically with market conditions.

Liquidation Penalty

• Paid to liquidators as a reward for repaying undercollateralized positions.

• Penalty varies by collateral asset. You can find out the parameters for each assets in Lending & Borrowing

Liquidation Factor

• Portion of the liquidation penalty allocated to the protocol 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?

To prevent liquidation, you can:

1. Repay the loan → increases Health Factor significantly

2. Deposit additional collateral → increases Health Factor

Repaying debt generally improves your Health Factor more than adding collateral.