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).
Position Health measures how much your collateral capacity at the Margin Requirement covers your current debt.
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.
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.
For more information on lFactor, check out this page: .
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.
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.
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%
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.
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.
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.