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The Liquidation Process
Liquidations: what are they, why needed, how managed?
It is important to remember that every debt in the protocol is secured by collateral, which value significantly exceeds the debt - this is the principle of over-collateralization. 🧠
Ratio between the amount of loan and the amount of collateral is an indicator of "health" (same name in the code - loan's health). It is the borrower's responsibility and interest to keep track of it. πŸ₯
The amount of loan changes over time (interest will come), and the amount of collateral can also change, cuz' NFT collections and their items can both rise and fall in value, and the price oracle tracks these changes. πŸ‘€
There is no time limit for the loan to be active, but to maintain his loan "healthy" borrower may need to repay it partly from time to time. πŸ’°
If at any point the "loan's health" goes into the margin of safety, the borrower will be notified, but if he takes no action and "health" gets even worse, gnomies will sell the collateral, which is liquidation itself. 🀝
Liquidating fungible tokens is easier - they are traded on DEXs, AMMs, but with NFT everything is much more complicated. Trying to sell them quickly at floor price can collapse the entire market, so it's not profitable for gnomies... πŸ™
The most adequate strategy, in terms of price and time, is to sell at auction to the community and by partnering with the best marketplaces.
We'll build a link between the protocol and the marketplace and will automatically send items that should be liquidated. The debt will be considered cancelled and the auction proceeds will pay off the protocol's costs. πŸ’«
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