Liquidation

Overview

Liquidation is a critical mechanism in the Pike, designed to maintain system stability and security when a borrower’s collateral value drops. This process protects both the protocol and its users from financial risks.

Understanding Liquidation

When you borrow assets using Pike, the sustainability of your loan is measured by your Health Factor. If the collateral value falls and renders the loan under-collateralized, the user’s position becomes at risk of liquidation. Liquidators can repay a portion of the loan in exchange for collateral, helping the system avoid financial stress.

How Does Liquidation Work?

Key Concepts

LTV, Liquidation LTV, Health Factor, Close Factor, and Liquidation Penalty are all important factors of the liquidation process. It is important to understand these concepts before diving into the liquidation flow.

In addition to these metrics, the liquidation process also involves a Liquidation Fee: a fee paid to the protocol, calculated as a percentage of the seized collateral (including the liquidation incentive). For example, with a 1% fee on $1,050 worth of collateral, the protocol would receive $10.50.

Liquidation Process

1. Triggering Liquidation

When the Health Factor falls below 1 due to decreased collateral value or increased debt, the protocol marks the loan as eligible for liquidation.

2. Partial Debt Repayment

Liquidators repay part of the debt (up to the Close Factor ) and receive discounted collateral. This improves the borrower’s Health Factor and reduces their outstanding debt.

3. Collateral Seizure

The liquidator receives the borrower’s collateral, potentially paying a liquidation fee to the protocol.

4. After Liquidation

• The borrower’s debt decreases at the cost of lost collateral.

• Liquidators gain discounted collateral.

• The borrower’s Health Factor adjusts based on remaining collateral and debt

Avoiding Liquidation

• Monitor your Health Factor regularly.

• Increase collateral to boost safety.

• Repay part of your loan to lower liquidation risk.

Maintaining Stability and Security

Liquidation is not just a penalty but a system to maintain balance, ensuring that:

• For the Protocol: Loans remain well-collateralized.

• For Liquidators: Incentives reward risk-taking and protocol stabilization.

• For Lenders: Ensures the safety of their deposits by preventing insolvency risks.