This section explains the technical aspects of liquidation and presents the details of an actual liquidation action.
To remain decentralized, IronLend cannot rely on a central entity to perform the liquidation but needs to incentivize other players to liquidate the collateral, repay the borrowed funds, and in return receive the collateral in another asset with some discount.
Why and when do liquidations happen? Liquidations are the results of unsuccessful bets and are highly correlated with steep changes in prices of underlying tokens. The changes cause borrowers that bet on the "wrong side" of the change to exceed their borrowing quota allowed by their collateral, leading to under-collateralization (in other words, the collateral becomes worth less than the borrowed amount) and become subject to liquidation. When the change is prices are steep, unprepared borrowers either lack the liquidity or the operational readiness to repay their borrowings or to increase the collateral and bring it back to healthy levels (collateral assets > borrowed assets) Collateral health of borrowers can be monitored in real time at:
Example: Price volatility and Liquidation (Ethereum, 21 Nov 2019)

Below are a few highlight steps that occur in the liquidation process:

  • When the borrowed amount is larger than a user's maximum collateral (under-collateralized borrower = if the amount borrowed exceeds the max borrowing), then 50% of the borrower's position gets liquidated.
  • As mentioned, since there is no central entity to perform the liquidation, there must be an incentive for other users to liquidate positions on behalf of the bad borrower. This incentive, also called the liquidation discount, amounts to 15% on IronLend. This 15% discount is what actually makes another user incentivized to take the action of liquidating an unhealthy borrower and taking over his debt obligation towards lenders.
  • The liquidators will then repay some or all of an outstanding borrowed amount on behalf of the original borrower and in return receive a discounted amount of collateral previously held by the borrower.
  • The liquidated portion of the borrowed amount is used for repaying borrowed assets, thus making lenders whole again and eliminating any risk to the IronLend protocol and its liquidity providers aka lenders.
Note: As the case with other lending platforms, liquidation is is a sophisticated game of professionals (for example, fully automated processes via smart contract execution). That means, in order to be successful, liquidators must be prepared to catch the liquidation opportunity as soon as it arises. Therefore they must be technically ready (e.g. highly available and automated) to identify the opportunity and have enough liquidity in the relevant asset to seize it ahead of others.
Last modified 5mo ago
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