Liquidation
A liquidation is a process that occurs when a borrower's health factor goes 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:
When the position may be liquidated.
When a position becomes unhealthy and requires liquidation, the liquidation engine will repay 50% of the position's debt and claim the same value in collateral, plus the liquidation penalty.
Liquidation is permissionless and we welcome third parties to develop liquidation infrastructure and monitor position health on Astera.
We will continue to iterate on Astera infrastructure to make liquidations as seamless as possible.
What is a Partial Liquidation?
A partial liquidation means that a liquidator can repay up to 50% of a user's debt instead of having to repay a user's entire debt. Someone with $1,000 in debt and a health factor < 1, could have $500 of their debt repaid in a single liquidation event.
How much is the liquidation penalty?
The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral.
Can you give me an example?
Example 1 Let's say a user deposits $110,000 of ETH in the Core Pool and borrows $80,000 of USDC (LTV ~72%). The liquidation threshold is 80%, so the user is safe, and the liquidation penalty is 8%. If the value of ETH falls and the user's collateral is worth $100,000, their position is at risk of liquidation.
If liquidated, Astera's liquidation engine will repay $40,000 of debt and receive (40,000 x 1.08 = $43,200) of ETH. The user's position is healthy again with $56,800 of ETH and $40,000 of debt (LTV ~ 70%).
If a user has multiple collateral types securing their loan and their position becomes unhealthy, the liquidator will claim the collateral with the highest liquidation penalty to execute the liquidation.
The liquidation engine considers slippage and adjusts liquidation sizes when needed.
If the position remains unhealthy after a liquidation event, the liquidation engine will execute another liquidation until the health factor is >1 again.
How can I avoid getting liquidated?
To avoid liquidation you can raise your health factor by depositing more collateral assets or repaying part of your loan. By default, repayments increase your health factor more than deposits. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation. You should be mindful of the stablecoin price fluctuations due to market conditions and how it might affect your health factor. For example, the market price of USDC might fluctuate to $0.99 in times of stress. The price fluctuations of stablecoins, like any assets, affects your health factor.
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