Liquidations

Liquidations on Monad testnet are currently under active development and may not function as expected compared to mainnet. Please be aware that testnet liquidations might behave unpredictably or incorrectly during this stage.

Ensuring Collateral Backing

Liquidations ensure that each 1 monUSD is always backed by at least one dollar worth of collateral.

Since each address can only have one collateral type, during liquidation only the Position address need to be specified.

An account becomes eligible for liquidation when a Position's Collateral is between the Minimum Collateralization Ratio and 100% collateralization (i.e. 100% < Position's Collateral < 120%).

An account becomes eligible for Redistribution when the Position's Collateral falls below or equals 100% (i.e., Position's Collateral <= 100%).

The liquidation process is initiated when the Liquidator calls the smart contract to perform the liquidation.

The Liquidator then proceeds to pay off the Borrower's Total Debt. In return, the Liquidator receives the Matching Collateral and the Liquidator Reward.

Matching Collateral

Matching Collateral is the amount of collateral equivalent to the Total Debt the Liquidator has paid off.

$$\text{Matching Collateral} = \frac{\text{monUSD debt}}{\frac{\text{wMON price}}{\text{monUSD price}}}$$

​Excess Collateral

The Excess Collateral, the difference between Total Collateral and Matching Collateral, is split between the Liquidator (Liquidator Reward) and the Protocol (Liquidation Protocol Fee).

The Liquidator Reward and Liquidation Protocol Fee are provided to encourage users to support the protocol and discourage borrowers from putting the protocol at risk by leaving their position to be liquidated.

If borrowers self-repay or top up their collateral, no liquidation penalties will be charged.

Liquidator Reward

The Liquidator Reward compensates the Liquidator for the risk they take on during the liquidation process.

Liquidator Reward Rate is a percentage of the Excess Collateral based on the Total Debt. The Liquidator Reward Rate is currently set to 100%, allowing Liquidator to collect the whole Excess Collateral.

The actual Liquidator Reward is simply the Excess Collateral multiplied by the above Liquidator Reward Rate.

$$\text{Liquidator Reward} = \text{Excess collateral} \cdot \text{Liquidator Reward Rate}$$

Liquidation Protocol Fee

The remaining Excess Collateral, if any, is transferred to the Protocol.

$$\text{Liquidator Protocol Fee} = \text{Excess Collateral} - \text{Liquidator Reward}$$