What is a Forced Liquidation event?
In the event a Loan becomes insolvent, any 3rd Party on the Proton Loan platform can repay the Loan and seize the collateral in return. The function of a "Forced Liquidation" is an important part of maintaining a functional Borrower/Lender ecosystem. 3rd Parties that step in to liquidate an insolvent Loan are incentivized to perform liquidations by receiving a premium on the seized collateral (i.e., they receive more collateral than the debt they repaid for the borrower).
When is my Loan considered insolvent and can be liquidated?
When the borrowed token increases above the maximum available to be borrowed threshold, defined as
Collateral Factor * $C, the Loan is considered to be insolvent and can be liquidated. When the Loan Health indicator approaches 0, the Loan is at risk of Forced Liquidation.
How do I prevent my Loan from being Liquidated?
The collateral factor also serves as a buffer for liquidations and ensures that a borrower becomes liquid again after liquidations occurred. A collateral factor of 100% would result in a borrower being completely liquidated and losing all their collateral as soon as they drop below their borrow threshold.
The current bonus liquidators get as a reward on collateral is 10%.
1. Deposit $1000 XPR and borrow $400 XPR
-> you have $1400 assets and $400 liability = $1000 net
2. Lets say you fall a bit under 0% loan health
3. Liquidator will come in and repay $40 XPR
-> liquidator gets $44 XPR of your deposits
-> you have $1356 assets and $360 liability = $996 net
-> your loan health is >0%