Liquidations

Liquidation is determined by liquidation collateral factors, which are separate from the borrowing collateral factors used to determine initial borrowing capacity. This separation safeguards the assets of borrowers and the protocol, ensuring that all new positions have price buffers. These factors also enable governance to reduce borrowing collateral factors without triggering liquidation of existing positions.

When the borrowing balance of an account exceeds the limit set by the liquidation collateral factors, it becomes eligible for liquidation. A liquidator (robot, contract, or user) can invoke the absorption function, relinquishing ownership of the account's collateral and returning it to the user at a value of the underlying assets minus a penalty (liquidation factor). The liquidated user has no remaining debt and typically has an excess (interest income) balance of the underlying assets.

Each absorption is paid for by the protocol's reserve of underlying assets. In return, the protocol gains ownership of the collateral assets.