# Liquidation

### What is liquidation*?*

Loan liquidation is a process of loan termination. Typically, it can occur in two cases:

* When the **Health factor** is **1 or below**, the **Lender** can manually trigger **Oracle Liquidation.**
* When the borrower fails to repay the loan before the deadline.

The **Lender** must have the specified **L** NFT bond, while the borrower must have the underlying **B** NFT bond to claim the remainder from the liquidation.

### **Oracle liquidation (the Borrower does not lose the entire Collateral)**

When the user triggers **Oracle liquidation** (e.g., when the **Health Factor** has dropped to 1 or below 1) and claims the **Collateral**, the amount to be received is calculated by the **Oracle**.

*Collateral\_for\_lender\_in\_ada=(loan\_value\_in\_ada+interest\_value\_in\_ada)+collateral\_value\_in\_ada*

*Collateral\_for\_borrower\_in\_ada=all\_collateral\_in\_ada - (loan\_value\_in\_ada+interest\_value\_in\_ada)*

In the event of **Oracle liquidation** (e.g., the **Health Factor** has dropped to 1 or below 1), the **Lender** pays a **Liquidation commission** (1.6% of the **Collateral**). The **Oracle** gives the **Lender** only part of the **Collateral** to cover the loan + 1.6% as commission.

### **Liquidation due to loan maturity (the Borrower loses the entire Collateral)**

When the **Loan term** matures, the **Lender** can liquidate the loan and claim the entire **Collateral**. **Borrowers** must repay their loans in time to avoid losing their **Collateral**.

**Keep in mind that repaying a loan earlier results in paying smaller interest which does not cover TX fees.**

<figure><img src="https://1021446076-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F-MbJ318ByJ_1XAqFUzX5%2Fuploads%2F0XGOqAkO7WTzFfpf6m0Z%2Fphoto_2023-06-19_11-34-55.jpg?alt=media&#x26;token=c0ef3b0f-eb79-4fef-ac88-629cdd868014" alt=""><figcaption><p>Liquidate loan.</p></figcaption></figure>

### **FAQ**

**1) Oracle fee (1.6 ADA)**

The **Oracle fee** is a **Liquidation fee** rewarded to the nodes (1.6 ADA is split between nodes) for signing and verifying each transaction.

**2) The loan counter starts 30 minutes after providing the loan**

The **Lender** is given a 30-minute advance to sign the transaction before the **Loan expiration time**. After successfully funding the loan, the loan timer activates and begins the countdown.