Liquidation

Liquidations

Liquidations protect the protocol from bad debt by allowing third parties to repay undercollateralized positions in exchange for discounted collateral.

Overview

When a borrower's Health Factor drops below 1.0, their position becomes liquidatable. Liquidators can repay a portion of the debt and receive collateral at a discount.

The Flow:

1. Borrower position becomes underwater (HF < 1.0)

2. Liquidator repays part of the debt

3. Protocol verifies HF < 1 and processes liquidation

4. Liquidator receives collateral + bonus

When Does Liquidation Occur?

Health Factor Trigger

Health Factor = (Collateral × Liquidation Threshold) / Borrowed

When HF < 1.0 → Position is liquidatable

Example Scenario

Initial Position:

Metric	Value
Collateral	$10,000 wcBTC
Liq Threshold	80%
Borrowed	$7,000 USDC
Health Factor	($10,000 × 0.80) / $7,000 = 1.14 ✓

After BTC drops 15%:

Metric	Value
Collateral	$8,500 wcBTC
Liq Threshold	80%
Borrowed	$7,000 USDC
Health Factor	($8,500 × 0.80) / $7,000 = 0.97 ✗ LIQUIDATABLE

How Liquidation Works

Step by Step

Step	Action	Description
1	Detection	Liquidator finds position with HF < 1
2	Calculation	Determine max liquidatable amount
3	Repayment	Liquidator repays portion of debt
4	Receipt	Liquidator receives collateral + bonus
5	Update	Borrower's position is adjusted

Close Factor

Liquidators can only repay up to 50% of the debt in a single transaction.

Max Single Liquidation = Total Debt × Close Factor (50%)

This prevents complete position closure in one transaction and gives borrowers a chance to recover.

Liquidation Bonus

Liquidators receive collateral at a discount as incentive.

Asset	Liquidation Bonus
USDC	5%
wcBTC	10%

Collateral Received = Debt Repaid × (1 + Liquidation Bonus)

Example:

• Debt repaid: $3,500 USDC

• Bonus: 10%

• Collateral: $3,500 × 1.10 = $3,850 worth of wcBTC

• Liquidator profit: $350

Liquidation Example

Before Liquidation

Metric	Value
Collateral	1 wcBTC = $8,500
Borrowed	$7,000 USDC
Liq Threshold	80%
Health Factor	0.97 (LIQUIDATABLE)

Liquidation Action

Metric	Value
Max repayable	$7,000 × 50% = $3,500 USDC
Liquidator pays	$3,500 USDC
Bonus	10%
Collateral received	$3,500 × 1.10 = $3,850 worth of wcBTC
wcBTC received	0.453 wcBTC ($3,850 ÷ $8,500)
Profit	$350

After Liquidation

Metric	Value
Collateral	0.547 wcBTC = $4,650
Borrowed	$3,500 USDC
Liq Threshold	80%
Health Factor	($4,650 × 0.80) / $3,500 = 1.06

✅ Position is now healthy again (HF > 1)

Avoiding Liquidation

Monitor Your Position

Indicator	Safe Zone	Action Needed
Health Factor > 2	🟢 Safe	None
Health Factor 1.5-2	🟡 Good	Monitor
Health Factor 1.1-1.5	🟠 Caution	Consider action
Health Factor < 1.1	🔴 Danger	Act immediately

Prevention Strategies

Strategy	How It Helps
Conservative borrowing	Don't max out borrow limit
Add collateral	Increase HF when it drops
Partial repayment	Reduce debt to improve HF
Set alerts	Get notified before danger zone
Diversify collateral	Reduce single-asset risk

Emergency Actions

When Health Factor approaches 1.0:

Option 1: Add Collateral → Deposit more wcBTC to increase collateral value

Option 2: Repay Debt → Repay some USDC to decrease borrowed amount

Option 3: Close Position → Fully repay and withdraw collateral

For Liquidators

Becoming a Liquidator

Anyone can be a liquidator. You need:

Requirement	Description
Capital	Assets to repay debt (e.g., USDC)
Gas	Citrea transaction fees
Monitoring	Track positions approaching liquidation
Speed	Liquidations are competitive

Profitability

Profit = Collateral Received − Debt Repaid − Gas Costs

Example:

• Debt repaid: $3,500

• Collateral received: $3,850

• Gas cost: $5

• Profit: $345

Competition

Liquidations are competitive. Multiple liquidators may attempt the same liquidation, and only one succeeds.

Protocol Protection

Bad Debt Prevention

Mechanism	Purpose
Over-collateralization	Loans always backed by excess value
Liquidation threshold	Trigger before debt exceeds collateral
Liquidation bonus	Incentivize quick liquidations
Close factor	Multiple liquidations may occur

Reserve Factor

A portion of interest payments goes to protocol reserves, providing a buffer against potential bad debt.

FAQ

Q: Can I be partially liquidated?

Yes. Liquidators can only close up to 50% of your position per transaction. If HF is still below 1 after, another liquidation can occur.

Q: Do I lose all my collateral?

No. You only lose enough collateral to cover the repaid debt plus the liquidation bonus. Remaining collateral stays in your position.

Q: Can I liquidate my own position?

Technically yes, but you'd lose the liquidation bonus to yourself, so there's no benefit.

Q: How do I know if I'm close to liquidation?

Monitor your Health Factor on the Zentra dashboard. Set up alerts for when it drops below 1.5.