Liquidation

Overview

Liquidation occurs when the value of a borrower's collateral does not adequately cover the value of the loan/debt, causing the borrower's health factor to fall below 1. This can happen when the value of the collateral decreases or when the value of the loan asset increases.

Example

Adam deposits 1,000 WEMIX worth of stWEMIX and borrows 920 WEMIX. In this case, the LTV of the withdrawal is at the maximum limit of 92%, but if the overall protocol loan rate is below 92%, no liquidation will occur because the stWEMIX interest rate (currently around 10% or more) on WEMIX.FI is higher than the WEMIX loan interest rate, which is currently 3.5% APY.

However, if the overall protocol loan rate is above 92%, the loan interest rate may spike upto ~200%, and if this situation persists, liquidation will occur if [loan principal + loan interest] exceeds [collateral principal + stWEMIX interest].

The liquidation penalty is 4%, of which the liquidator can keep an additional 2.6% in exchange for liquidation.

To Prevent Liquidation

You can avoid liquidation by keeping your health factor above 1. You can increase your health factor by paying off a portion of your debt or depositing additional collateral.