Liquidations

Liquidations

Liquidations are a crucial mechanism to ensure the stability and integrity of the overall Curvance protocol.

The liquidation price is the threshold value of collateral below which a borrower risks insolvency and asset liquidation is triggered. It is determined by the collateralization ratio, specifying the required value of collateral compared to the borrowed amount. If the collateral’s market value falls below this liquidation price due to market fluctuations, the position may face liquidation to protect lenders from potential losses.

Most lending platforms are built with single-point liquidation levels, as described above. This introduces either overly protective liquidation levels, making the product unpleasant to use, or too generous liquidation levels, creating a significant risk of bad debt.

For that reason, Curvance has built a custom liquidation engine that leans into the liquidation price. As the collateral price gradually decreases below the liquidation price, more collateral of the liquidating user becomes available on the liquidation market. Along with the slowly increasing available collateral, the penalty to the party being liquidated and bonus for the liquidator also increase to incentivize the closure of the out-of-ratio position.

If any bad debt accrues to the Curvance protocol, it is handled through socialized losses, where the bad debt is spread to all active lenders in the system.