# 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) --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.alkemi.network/user-guide/liquidation.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.