🔥 Liquidation
Conditions Triggering Liquidations
Liquidations in the Roots protocol occur when the collateral ratio of a borrowing position falls below the Liquidation Threshold (120%). This ensures that the borrowed $MEAD remains adequately backed by collateral. Factors such as market volatility, sudden drops in the value of collateral, or an increase in the value of the borrowed asset can trigger liquidations.
Process of Liquidation
When a liquidation event is triggered, the protocol automatically liquidates the necessary portion of the collateral to cover the debt. The liquidation process involves two primary routes:
Stability Pool Liquidation
- Trigger: The collateral ratio falls below 120%.
- Liquidation: The protocol sells the necessary portion of the collateral to $MEAD stakers in the Stability Pool.
- Settlement: The debt is repaid, and any remaining collateral is returned to the borrower.
Example
- Staking $MEAD: Deposit 100 $MEAD into the Stability Pool.
- Liquidation Event: A position with 12 $BERA collateral and 100 $MEAD debt is liquidated.
- Debt Repayment: 100 $MEAD from the Stability Pool is used to repay the debt.
- Collateral Distribution: 12 $BERA is distributed to Stability Pool participants.
- Surplus (Premium): The difference between the market value of 12 $BERA and the 100 $MEAD used to repay the debt is the surplus earned by participants.
Exchange Liquidation
- Trigger: The collateral ratio falls below 120%.
- Liquidation: The protocol sells the necessary portion of the collateral on exchanges using price aggregators.
- Settlement: The debt is repaid, and any remaining collateral is returned to the borrower.
Avoiding Liquidations and Managing Risks
To avoid liquidations, it is essential to maintain a healthy collateralization ratio. Here are some strategies:
- Regular Monitoring: Keep a close watch on your collateral's value and your borrowing position. Use tools and alerts to stay updated on significant changes.
- Maintain a Buffer: Keep your collateralization ratio well above the minimum required level to protect against sudden market swings.
- Add More Collateral: If your collateral value drops or market conditions become volatile, consider adding more collateral to your position.
- Repay Part of Your Loan: Reducing the amount of your outstanding loan can help maintain a safe collateralization ratio.
- Stay Informed: Keep up with market trends, news, and updates from the Roots protocol.
By proactively managing your collateral and being aware of market conditions, you can mitigate the risks associated with liquidations and ensure a stable borrowing experience within the Roots protocol.