Liquidations

Liquidations in Curvance

Liquidations play a vital role in maintaining the stability and integrity of the Curvance protocol by protecting lenders from potential losses. Liquidations are triggered when the value of a borrower’s collateral falls below a defined threshold, known as the Health Factor.

Understanding the Health Factor

The Health Factor measures an account’s stability and capacity to cover borrowed funds. Calculated as:

Health Factor = Collateral / (Debt * Debt Multiplier)

Where:

Collateral = User's Collateral Value inside the Market

Debt = User's Debt Value inside the Market

Debt Multiplier = Additional requirement to manage market collateral

• A Health Factor above 1 signifies sufficient collateral value and a safe position.

• A Health Factor below 1 indicates insufficient collateral value, triggering Curvance’s liquidation processes.

The liquidation engine is proactive and designed to protect borrowers from hard liquidations by implementing a linear scale between "soft" and "hard" liquidation levels. The severity of liquidations is continuous as collateral runs out and travels along a linear curve from soft liquidation to hard liquidation. The severity of a liquidation is calculated from a user's lFactor or liquidation factor. A liquidation factor of 0 indicates that no liquidation is possible, whereas a liquidation factor of 1 indicates a full hard liquidation.

• Soft Liquidation: A partial liquidation occurs with a small penalty, preserving more of the user's collateral, making Curvance more forgiving during times of low volatility.

• Hard Liquidation: Full liquidation with a high penalty if the Health Factor is critically low, meaning Curvance can shed risk faster than other lending protocols in times of high volatility.

Recommendation: Maintaining a Health Factor above 1, ideally at 1.5 or higher during market volatility, is advised to reduce liquidation risk.

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Liquidations in Other Protocols

Most lending protocols set single-point liquidation levels, creating a trade-off:

• Overly Conservative Liquidation Levels: This can lead to premature liquidations, making the user experience less favorable.

• Overly Generous Liquidation Levels: This may increase the risk of bad debt within the protocol.

Other lending protocols also tend to only look at three different factors to determine liquidations:

• Collateralization Ratio: Determines the maximum borrowing threshold for each asset.

• Liquidation Threshold: Equivalent to the Curvance protocol's Hard Liquidation Threshold, this looks at when a position should be liquidated by half or in full.

• Liquidation Fee: A fee on the user's collateral value during a liquidation that goes back to the protocol in the form of revenue.

Curvance’s Dynamic Liquidation Engine

The Dynamic Liquidation Engine allows for more flexibility in determining liquidation thresholds, how much of a position gets liquidated, the fee associated with that liquidation, and the incentives for liquidators in each scenario. This is done using the following configurable values:

• Collateralization Ratio: Determines the maximum borrowing amount per $1 of collateral for each asset.

• Soft Collateral Requirement: The premium of excess collateral required to avoid triggering a soft liquidation.

• Hard Collateral Requirement: The premium of excess collateral required to avoid triggering a hard liquidation.

• Soft Liquidation Incentive: The base incentive to liquidate a user position.

• Hard Liquidation Incentive: The maximum incentive to liquidate a user position.

• Liquidation Fee: The fee the protocol takes from a user's collateral during a liquidation.

• Base Close Factor: The % of outstanding user debt that can be closed for a user position.

Liquidation Scenario: Tony has $1,000 of ETH posted as collateral with $900 in outstanding debt. Soft Collateral Requirement = 120%

Hard Collateral Requirement = 110%

Soft Liquidation Incentive = 4%

Hard Liquidation Incentive = 6%

Liquidation Fee = 0%

Base Close Factor = 20% Tony is below their collateral requirement to avoid soft liquidation (1000 / 120% = $833.33 < $900 but avoids a full hard liquidation (1000 / 110% = $909 !< $900)

Tony has a current lFactor = (900 - (1000 / 120%)) / ((1000 / 110%) - (1000 - 120%)) = 88% This results in a liquidation amount of 20% + (100% - 20%) * 88% = 90.4%,

with a liquidation penalty of 4% + (6% - 4%) * 88% = 5.76% Any address could then liquidate Tony by repaying $900 * 90.4% = $813.6 of their outstanding debt and receive $813.6 * 105.76% = $860.46 in ETH from Tony.

This approach balances the user experience and protocol stability, minimizing the risk of sudden liquidations for borrowers while protecting the protocol and lenders against bad debt.