> For the complete documentation index, see [llms.txt](https://docs.alkemi.network/user-guide/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.alkemi.network/user-guide/liquidation.md).

# Liquidation

## **Overview**

### What is Liquidation?

When providing collateral to borrow on the Earn platform, it is important to maintain collateralization ratios within the stated bounds. If a user's account becomes under-collateralized, they may face a liquidation event where a portion of their collateralized deposits are liquidated to repay part of their outstanding loan. Exchange rates are a key variable in the collateralization ratio and volatility in digital currency markets is significantly higher than fiat currency markets.

Each market specifies a maximum loan to value ("LTV") ratio that a user must observe in order to avoid a liquidation event. If a user exceeds the LTV ratio, a portion of their outstanding loan becomes eligible for liquidation. There is the option to repay currency borrowed or add collateral, but if a user fails to do so, other users can pay off a portion of the loan at a discounted rate (10% discount) and seize collateral.

### **The 3 States:**

Assumption: maximum LTV ratio is set at 80% for the assets being used as collateral.

1. **Good standing** = the collateral supplied satisfies the loan to value rate of borrowed currency. ![](https://latexmath.bolo-app.com/render/1.0/img/d34b19defb84232d9b0dbd3fdc7598f7)
2. **Recoverable Default** = borrowed currency levels are covered by collateral available without risk of loss.
3. **Unrecoverable Default** = deposited collateral cannot cover the underwater or bad liquidation.

## Flow Chart

This chart describes the flow Earn uses to manage liquidations.

![](https://paper-attachments.dropbox.com/s_36166238AEE03B17949D5139C61F7107D19B18328BB06A59ABD3AAD912A1D59A_1583676727713_liquidate.png)