Liquidation
#The most efficient and safe lending on Aptos
The protocol's liquidity is determined by the assets available for essential operations like borrowing against collateral and claiming supplied assets with accrued yield, a crucial metric to prevent operational blockages.
The protocol's liquidity status can be evaluated at any given time by examining the utilization ratio, which indicates the proportion of reserves currently borrowed compared to the total supply of each asset within the protocol.
Tools for mitigating liquidity risk are available through the borrow interest rate model.
A liquidation process is triggered when a borrower's risk factor goes above 1, indicating that their collateral no longer adequately covers their loan or debt value. The risk factor represents the ratio of the collateral's value to the loan's value, serving as a crucial indicator of the borrower's financial stability. A decrease in the collateral value or an increase in the debt value can cause this ratio to increase, heightening the risk of a liquidation event.
Key Concepts
Risk Factor:
The risk factor is a numerical representation of the risk of a borrower's loan position.
A risk factor above 1 means the position is undercollateralized and at risk of liquidation.
Risk factor formula:
Triggering Liquidation:
Liquidation is triggered when the risk factor goes above 1.
This can happen if the collateral value decreases or the debt value increases.
Liquidation Process Steps
Calculate Up to 50% Debt Repayment:
In a liquidation event, up to 50% of the borrower's debt is repaid using the collateral.
Calculate Liquidation Fee:
A liquidation fee is added to the value of the debt being repaid. This fee compensates liquidators and covers the costs of the liquidation process.
Deduct Collateral:
The total value (debt repayment + liquidation fee) is taken from the collateral.
After liquidation, the amount deducted from the borrower's collateral is used to repay the liquidated portion of the debt.
Example 1: Deposit stAPT to borrow APT
Let's consider a borrower with the following details:
Initial Situation ( in condition 1 APT = 1 stAPT )
Collateral Value: 1000 stAPT
Debt Value: 750 APT
Liquidation Threshold: 80%
Liquidation Fee: 5%
Triggering Event
The value of the collateral decreases, leading to the following situation:
New Collateral Value as collateral decrease: 600 stAPT
Liquidation Trigger
The decrease in collateral value causes the risk factor to goes above 1, triggering liquidation.
Liquidation Process
Calculate 50% Debt Repayment:
Debt to Repay: 50% of 750 APT = 375 APT
Calculate Liquidation Fee:
Liquidation Fee: 5% of 375 APT = 18.75 APT
Total Amount Deducted from Collateral:
Total Deduction: 375 APT (Debt Repayment) + 18.75 APT (Liquidation Fee) = 393.75 APT
Post-Liquidation Position
After the liquidation, the new values are:
Remaining Collateral: 600 stAPT - 393.75 APT = 206.25 stAPT
Remaining Debt: 750 APT - 375 APT = 375 APT
Adjusted Scenario: Deposit multiple assets to borrow one asset
Depositing stAPT and USDC to Borrow APT
Initial Situation: ( in condition 1 APT = 1 stAPT )
Collateral Value (stAPT): 500 stAPT
Collateral Value (USDC): 3000 USDC
Debt Value: 750 APT
Liquidation Threshold: 80%
Liquidation Fee: 5%
Triggering Event: Collateral Value Decreases
The value of both stAPT and USDC collateral decreases, leading to the following situation:
New Collateral Value (stAPT) as collateral decrease : 300 stAPT
Collateral Value (USDC) as collateral remains the same : 3000 USDC
Liquidation Trigger
Despite the decrease in the collateral's value, the combined value of stAPT and USDC falls below the liquidation threshold, triggering liquidation.
Liquidation Process
Debt to Repay: 50% of 750 APT = 375 APT
Liquidation Fee: 5% of 375 APT = 18.75 APT
Total Amount Deducted from Collateral: 393.75 APT
Post-Liquidation Position
After the liquidation, the new values are:
Remaining Collateral (stAPT): 300 stAPT
Remaining Collateral (USDC): 3000 USDC
Remaining Debt: 375 APT
Summary
Before Liquidation:
Collateral (stAPT): 500 stAPT
Collateral (USDC): 3000 USDC
Debt: 750 APT
Risk Factor < 1 (Safe)
After Liquidation:
Collateral (stAPT): 300 stAPT
Collateral (USDC): 3000 USDC
Debt: 375 APT
Liquidation Penalty Paid: 18.75 APT
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