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Liquidate Positions

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Overview

1. Liquidator repays a portion of the borrower’s debt
2. Liquidator receives collateral worth more than the debt repaid (the liquidation incentive)
3. Borrower’s debt and collateral both decrease
4. System returns to a healthier state

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Prerequisites

• Hold the stablecoin (Coin) to repay debt
• Ability to monitor positions for liquidation opportunities
• Understanding of gas costs vs liquidation profit
• Optional: Bot infrastructure for competitive liquidation

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When Can a Position Be Liquidated?

Debt > Collateral Value × Collateral Factor

LTV = Debt / Collateral Value > Collateral Factor

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Example

• Collateral: $10,000 worth of ETH
• Collateral Factor: 80% (8000 bps)
• Borrowing Power: $8,000
• Current Debt: $8,500

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Liquidation Mechanics

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Liquidation Amount

• 25% of the borrower’s total debt, OR
• Minimum 10,000 Coin (whichever is larger)

// Liquidation amount calculation
liquidatableDebt = debt / 4; // 25% of debt
if (liquidatableDebt < 10_000e18) {
    liquidatableDebt = debt < 10_000e18 ? debt : 10_000e18;
}

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Liquidation Incentive

• 80% LTV → 0% incentive
• 82.5% LTV → 5% incentive
• 85%+ LTV → 10% incentive

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Collateral Received

Collateral Value Received = Debt Repaid × (1 + Incentive%)
Collateral Amount = Collateral Value / Oracle Price

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Step-by-Step Guide

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Step 1: Find Liquidatable Positions

• Debt > Borrowing Power
• Oracle is not stale (liquidations enabled)

// Check if position is liquidatable
(uint price,, bool allowLiquidations) = lender.getCollateralPrice();
uint debt = lender.getDebtOf(borrower);
uint collateral = lender._cachedCollateralBalances(borrower);
uint borrowingPower = price * collateral * collateralFactor / 1e18 / 10000;

bool isLiquidatable = allowLiquidations && debt > borrowingPower;

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Step 2: Calculate Profitability

1. Calculate expected collateral reward
2. Subtract gas costs
3. Account for slippage if selling collateral

// Preview liquidation reward
uint repayAmount = // your chosen amount
uint incentiveBps = // calculate based on current LTV
uint collateralValue = repayAmount * (10000 + incentiveBps) / 10000;
uint collateralAmount = collateralValue * 1e18 / oraclePrice;

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Step 3: Execute Liquidation

1. Approve Coin spending (first time only)
2. Call the liquidate function with appropriate parameters

// Execute liquidation
uint collateralReceived = lender.liquidate(
    borrowerAddress,
    repayAmount,
    minCollateralOut  // slippage protection
);

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Step 4: Handle Received Collateral

• Hold for exposure
• Sell on DEX for stablecoins
• Use as collateral elsewhere

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Bad Debt Socialization

1. Borrower’s position is cleared (debt and collateral set to zero)
2. Remaining debt is distributed pro-rata among all other borrowers
3. Liquidator receives any remaining collateral

// Write-off happens automatically, or can be called directly
lender.writeOff(borrowerAddress, receiverAddress);

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Liquidation Restrictions

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Oracle Staleness

• Price feed hasn’t updated within staleness threshold (25 hours)
• During staleness, a price decay mechanism gradually reduces the reported price
• After 24 additional hours of staleness, price reaches near-zero

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Reduce-Only Mode

• Triggered by stale or invalid oracle prices
• Borrowers can only repay debt and withdraw collateral
• No new borrows or liquidations allowed

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Profit Calculation Example

• Borrower debt: 40,000 Coin
• Collateral: 1 ETH worth $50,000
• Collateral factor: 80%
• Current LTV: 80% (at liquidation threshold)

• Liquidatable: 10,000 Coin (25% = 10,000, above minimum)
• LTV: 80% → Incentive: 0%
• Collateral received: 10,000 / 50,000 = 0.2 ETH ($10,000)

• Same scenario but LTV at 85%
• Incentive: 10%
• Collateral received: 10,000 × 1.10 / 50,000 = 0.22 ETH ($11,000)
• Profit: $1,000 minus gas costs

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Quick Reference

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Building a Liquidation Bot

1. Monitor positions: Index all borrowing positions and their health
2. Track prices: Watch oracle updates for liquidation triggers
3. Calculate gas: Ensure profitability after transaction costs
4. Use Flashbots: Protect against front-running on supported networks
5. Handle reverts: Positions may be liquidated by others between detection and execution

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Risks

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Competition

• Other liquidators may execute first
• Gas price wars during volatile markets

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Oracle Lag

• Price may move between detection and execution
• Use appropriate slippage protection

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Gas Costs

• High gas during congestion can eliminate profits
• Consider gas price limits

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Collateral Risk

• Received collateral may depreciate before sale
• Consider instant DEX swaps

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Related

• Liquidations Protocol
• Bad Debt Socialization
• Lender Contract Reference