Position Health & Liquidations
Each pair has a configured Maximum Loan-To-Value (LTV). Over time, as interest is capitalized, borrowers must add more collateral or repay a portion of their debt. Otherwise they risk having their position become unhealthy. To determine a borrower’s LTV we use the value of the collateral and the value of the fTokens.
Share Price is the price of 1 fToken in Asset Token Units (i.e. AssetToken:fToken ratio) Exchange Rate is the price of 1 Asset Token in Collateral Units (i.e. Collateral:Asset ratio)
When a borrowers LTV rises above the Maximum LTV, any user can repay the debt on the borrower's behalf and receive an equal value of collateral plus a liquidation fee. The liquidation fee is immutable and defined at deployment. By default the value is set to 10% and can be accessed by calling the
liquidationFee()view function on the pair. The configured Maximum LTV can be found by calling the
maxLTV()function on the pair.
Liquidators can close a borrower's position as soon as LTV exceeds the Maximum LTV (typically 75%). However, in cases of extreme volatility, it is possible that liquidators cannot close the unhealthy position before the LTV exceeds 100%. In this unlikely scenario bad debt is accumulated. In this case, the liquidator repays the maximum amount of the borrower's position covered by the borrower's collateral and the remaining debt is reduced from the total claims that all lenders have on underlying capital. This prevents the situation wherein lenders rush to withdraw liquidity, leaving the last lender holding worthless fTokens (commonly known as "bad debt" in other lending markets) and ensures the pair is able to resume operating normally immediately after adverse events.