Liquidation

A liquidation is a process that occurs when a borrower's Health Factor is reduced to 1 or lower due to their collateral value not properly covering their loan/debt value. This might happen when the collateralized asset value decreases or the borrowed asset value increases.

Liquidation is determined by factors related to the collateral used to secure borrowed assets, which are used to calculate the initial borrowing capacity. (Collaterals and Reserves)

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.

In a liquidation, up to 50% of the borrowing debt is repaid and that value plus the liquidation fee is taken from the collateral available. After a liquidation, that amount liquidated from your debt is repaid.

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.