Liquidation

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Introduction

KYC / AML and Allow-listing

Connecting to Alkemi Earn

Lending and Borrowing

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. 
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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.
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Lending and Borrowing

Rates and Fees

Last modified 5mo ago

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