Liquidations
Last updated
Last updated
Liquidations occurs when a user's collateral value does not properly cover the position’s borrowed amount.
Each collateral market will have different liquidation thresholds, defined by the maximum Loan-to-Value Ratio (LTV). Once a Collateralized Debt Position (CDP) goes above the max defined LTV, it will become eligible for liquidation. Liquidators, then, will be able to repay a position's debt in exchange for a portion of the user's collateral.
Unlike most protocols where all user collateral is equally at risk of a liquidation event, on the Alto protocol, each Collateralized Debt Position (CDP) is isolated and only at risk of the individual CDP being liquidated. Users can open multiple CDPs which will have separate liquidation prices. For example, a user could open two CDPs with ETH and stETH as collateral(s), with different LTVs (Loan-to-Value ratios) of 90% and 86% respectively, that will have separate, isolated liquidation prices. If a user believed a certain asset had a higher chance of decreasing in value (ETH vs stETH), they can choose to borrow less USDO with their ETH collateral than with their stETH.
To ensure that a position will not be liquidated over and over with falling prices, there is also a safety buffer applied, which brings the user 5% below the market's max LTV.
A partial liquidation is the gradual seizure of collateral by the lender if the borrower’s collateral changes in value relative to the loan, rather than a full liquidation wherein once the liquidation price has been met, a majority or all of the borrower's collateral is seized. Borrowers who are subject to partial liquidation will encounter a smaller overall penalty, as the liquidated amount is smaller, and thus, the fee on the total liquidated amount will also be smaller.
All liquidations on Alto protocol are partial, unless a borrower's loan has met or exceeded a 100% LTV. This is because Alto features dynamic closing factors.
Alto's Dynamic Closing Factor protects both the user from drastically loosing all his collateral and the protocol from toxic liquidation spiral events.
Alto also utilizes Dynamic Liquidation Incentives to offer the largest allowable liquidation incentive given a user’s loan-to-value ratio at the very moment of them reaching liquidation, which prevents toxic liquidations.
There is a linear decrease in the liquidator's rewards from a maximum to a minimum. This is in addition to the flat base reward.
Dynamic Closing Factors and Liquidation Incentives were implemented based on the findings in the .