Liquidation
Overview
Liquidation is a safety mechanism in Fervent Finance that ensures the protocol remains solvent and protects lenders. When a borrower’s collateral falls below the required threshold, part of their collateral can be sold to repay their debt.
How Liquidation Works
Every borrowed position has a borrow limit based on the collateral factor of the supplied assets. If the value of your borrowed assets exceeds your allowed limit:
Your position becomes under-collateralized.
Other users, called liquidators, can repay a portion of your debt.
In return, liquidators receive a discounted portion of your collateral.
This process helps maintain the health of the lending pool and ensures lenders are protected.
Key Parameters
Collateral Factor: Maximum borrowable percentage of supplied collateral (e.g., 70% for KAS)
Liquidation Threshold: The point at which liquidation is triggered (often slightly below the collateral factor)
Close Factor: Maximum portion of a borrow that can be liquidated in a single transaction
Liquidation Bonus: Extra incentive given to liquidators for repaying under-collateralized debt (e.g., 8%)
Example
Suppose you deposited $1,000 worth of KAS with a collateral factor of 70%, allowing you to borrow $700.
If your borrow value rises to $750 due to market volatility, your position becomes under-collateralized.
A liquidator can repay part of your debt, say $200, and receive $216 worth of your collateral (8% bonus).
This keeps the pool solvent and incentivizes participation in maintaining the system.
Why Liquidation Matters
Protects Lenders: Ensures lenders can always be repaid even if markets fluctuate.
Maintains Solvency: Prevents bad debt from accumulating in the protocol.
Incentivizes Active Participation: Liquidators are rewarded for keeping the protocol safe.
Best Practices for Borrowers
Maintain a healthy collateral ratio above the minimum required.
Monitor your borrow positions regularly.
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