Liquidations
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Liquidation occurs when a borrower's collateral value falls below a certain threshold, making the loan risky. To protect the system, third-party participants, known as liquidators, can repay the borrower's debt and claim either part or all of the collateral, usually at a discount. As an incentive, liquidators typically receive a 2.5% fee from the collateral for their role in stabilizing the lending pool.
In simple terms, the liquidator repays the loan and receives part of the collateral to compensate deb + fee.
The Liquidation Threshold (LT) is a crucial metric that specifies the loan-to-collateral ratio at which a loan becomes subject to liquidation. LT is a key value when determining the health factor:
Liquidation Threshold is defined at the time of pool creation as a pool . In the event of liquidation, the liquidator is expected to swap the acquired collateral asset for the loan asset, which could move the market and result in cascading liquidations. Therefore, a higher LT should be applied to low-liquidity collateral assets, while a lower LT is suitable for more liquid assets.
