Liquidation

If the collateral's value falls below the borrowed amount, the borrower's position is subject to liquidation. The borrow limit sets the risk threshold, and liquidation is triggered when this ratio surpasses the maximum Loan-to-Value (LTV) limit.

What is the Max LTV?

The Max LTV represents the percentage of the collateral's value that can be borrowed. For instance, if the Max LTV for USDC is 80%, a user can borrow up to 80 USDC against a collateral of 100 USDC.

\rm Max~LTV = \frac{\sum collateral_\it i ~ \rm in~ dollars\times~LTV_\it i }{Supplies}

The Borrow limit for a user is determined by the weighted average of the LTV ratios of its collateralized assets.

$$\mathrm{Borrow \ Limit} = \sum \mathrm{ Supply _{market} \times Max \ LTV_{market} \times \ Value_{market} }$$

However, if the loan value surpasses 80% of the collateral's value, a partial liquidation is initiated. In this scenario, LayerBank or an authorized third-party liquidator receives a 15% liquidation incentive. They will liquidate up to 50% of the borrower's collateral. After deducting the liquidation incentive, the remaining amount is returned to the borrower, thereby restoring the borrower's health factor to a stable level.

Liquidations are executed automatically. In such events, LayerBank closes the borrower's position, reallocates the collateral value to the lending pool, and returns any residual assets to the borrower.