Liquidations FAQ

Introduction

Liquidation is the sale of collateral to reduce systemic risk when a borrower's collateral assets do not meet system requirements.

Consistent with other DeFi protocols that include collateralized lending business scenario, liquidation is an important mechanism throughout Defed to protect against financial risk. Liquidation will occur when an account's health factor falls below a Defed-specified standard (i.e., when Defed assesses that the value of the account's collateral does not cover their debt/credit position based on a combination of factors).

When liquidation occurs, will all of my collateral be liquidated directly?

Defed will conduct the liquidation process as necessary and will not normally liquidate all collateral. When liquidation occurs, Defed will gradually liquidate the collateral until the account health factor returns to 1.

How do I avoid liquidation?

To prevent liquidation, you need to deposit more assets as collateral, or repay loan/interest payments to ensure your health factor is above 1.

Can I participate in the liquidations ecosystem?

Yes, Defed's clearing mechanism is open to anyone with clearing ability. However, since clearing is profitable in most cases, competition will be fierce and this may require some program development skills. For Defed, the ability to clear faster and at a better price is the most important consideration. Upon completion of liquidation, the liquidator will receive a liquidation bonus.