Liquidation

Borrow Factor

We employ a two-sided strategy in which the borrow factor is also used to increase the market value of a borrower's liabilities. With this method, we may take into account the risks associated with individual assets for both upward and downward price fluctuations. These risks are incorporated in borrow factors and asset-specific Loan to Value Ratio (as on Compound).

This strategy ultimately implies that each borrower's liquidation threshold is customized to the unique risk profiles of the assets they are borrowing and using as collateral.

To give an example, suppose a user has $1,000 worth of USDC, and wants to borrow APT. How much can they borrow?

If USDC has a collateral factor of 0.9, and APT has a borrow factor of 0.7, then a user can borrow up to $1,000 * 0.9 * 0.7 = $630 worth of APT. At this level of borrowing, the risk-adjusted value of their collateral is $1,000 * 0.9 = $900, and the risk-adjusted value of their liabilities is $630 / 0.7 = $900. If APT increases in price, then the risk-adjusted value of their liabilities will also increase to >$900, and then they will be eligible for liquidation. The buffer allowing for liquidation is $1,000 - $630 = $370.

Liquidation Calculations

When a user's total borrowing reaches a threshold, or when the risk factor reaches 100% or higher, liquidation takes place.

The risk factor is an indicator of a user's total liquidation risk. The danger decreases when users provide more collateral to the system. Conversely, the danger rises when users take on more debt.

When a user has reached its liquidation threshold, up to 50% (in terms of market value) of the total borrowed asset is sold to the liquidator at a discounted price to repay a portion of the loan.