# 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 Position Health falls below 1 (i.e., collateral capacity at the Margin Requirement is insufficient to cover debt). ### **Understanding Position Health** Position Health measures how much your collateral capacity at the Margin Requirement covers your current debt. {% hint style="info" %} *Position Health = Collateral Capacity at Margin Requirement /* Debt *Where:* *Margin Requirement (Soft Collateral Requirement): The minimal collateral buffer required to avoid soft liquidation (e.g., 140%). Curvance applies an auction buffer when evaluating this capacity.* *Collateral Capacity at Margin Requirement: Your collateral value, weighted by Margin Requirement and Curvance's auction buffer.* *Debt: Your outstanding debt value in the market.* {% endhint %} * If Debt = 0: Position Health is effectively infinite. * Position Health ≥ 1: sufficiently collateralized (safe under the Margin Requirement). * Position Health < 1: below the Margin Requirement (eligible for soft liquidation). Hard liquidation uses the hard collateral requirement. 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.* {% hint style="info" %} For more information on lFactor, check out this page: [Dynamic Liquidation Engine](https://docs.curvance.com/cve/developer-docs/dynamic-liquidation-engine-dle#lfactor-liquidation-factor). {% endhint %} *** ## **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. {% hint style="info" %} 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. {% endhint %} 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.