Liquidation

Liquidation is determined by factors related to the collateral used to secure borrowed assets, which are used to calculate the initial borrowing capacity. When the outstanding borrowed amount in an account surpasses the predefined limits set by these collateral factors, that account becomes eligible for liquidation. Liquidation can be initiated by a liquidator, which can be a bot, smart contract, or individual user. This process involves invoking the "absorb" function, which transfers control of the account's collateral to the liquidator and returns the collateral's value to the user, minus a penalty known as the liquidation factor, in the form of the base asset.

Each absorption is paid for by the protocol’s reserves of the base asset. In return, the protocol receives the collateral assets. If the remaining reserves are less than the target, liquidators are able to buy the collateral at a discount using the base asset, which increases the protocol’s base asset reserves.

For a calculation example of a liquidation, you can check our FAQ.