Liquidations

The health of the HopeLend Protocol depends on the health of the collateralized positions within the protocol, also known as the health factor. Liquidation is a process that occurs when a borrower's health factor goes below 1 due to their collateral value not properly covering their loan/debt value. This might happen when the collateral decreases in value or the borrowed debt increases in value against each other.

When the health factor of an account's total loans is below 1, anyone can make a liquidationCall to the HopeLend Pool contract, pay back part of the debt owed and receive discounted collateral in return (also known as the liquidation bonus).

This incentivizes third parties to participate in the health of the overall protocol by acting in their own interest (to receive the discounted collateral) and, as a result, ensure borrowers are sufficiently collateralized.

What is the health factor?

The health factor is the numeric representation of the safety of your deposited assets against the borrowed assets and their underlying value. The higher the value, the safer your funds' state is against a liquidation scenario.

How is health factor calculated?

The health factor is calculated from the user's total collateral balance (in ETH) multiplied by the liquidation threshold percentage for all the user's outstanding assets, divided by the user's total borrow balance across all reserves (in ETH):

Hf=CollateraliinETH×LiquidationThresholdiTotalBorrowsinETHH_f = \frac{ \sum{Collateral_i \: in \: ETH \: \times \: Liquidation \: Threshold_i}}{Total \: Borrows \: in \: ETH}

When Hf=1H_f = 1 the liquidation of your position will be triggered.

When Hf<1H_f < 1 the position may be liquidated to maintain solvency.

How will a loan be liquidated?

1. Partially Liquidation of Positions

  • 1 > health factor ≥ 0.95

If the value of the collateral falls, causing the debt to be undercollateralized, and the health factor is less than 1 and greater than 0.95, the HopeLend protocol will initiate liquidation of the user's 50% position.

2. Full Liquidation of Positions

  • health factor < 0.95

Full liquidation is used as a final option when the collateral value declines, causing the health factor to fall below the 0.95 threshold.

In such cases, HopeLend sells off the borrower's entire collateral to repay the debt. A liquidation penalty is charged during this process, which adds to the borrower's repayment obligations. Borrowers should carefully monitor their borrowing positions and ensure adequate collateralization to prevent liquidation events and potential losses.

How can I avoid liquidation?

In order to avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more assets in order to increase your health factor. Out of these two available options, repaying the loan would improve your health factor more.

Also, it's important to monitor your health factor and keep it high to avoid liquidation. For example, keeping your health factor over 2 gives you more of a margin to avoid liquidation.

It would help to be mindful of the stablecoin price fluctuations due to market conditions and how they might affect your health. For example, the market price of USDC 1.00 might not equal exactly USD 1.00, but for example, USD 0.95. Like any asset, the price fluctuations of stablecoins affect your health factor.

How much is the liquidation penalty?

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral.

Can I participate in the liquidations ecosystem?

Yes, liquidations are open to anyone, but there is much competition. Normally liquidators develop their own solutions and bots to be the first ones liquidating loans to get the liquidation bonus. You can find more details in the developers' liquidation section.

Click the page below for more liquidation execution references:

pageLearn More about Liquidations

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