Liquidations

Liquidations are an integral part of a DeFi money market, they help to maintain the health of the protocol. Whilst different protocols may use slightly different mechanisms, they mostly follow the same principals; a Liquidator repays the borrowers liabilities in exchange for the borrowers collateral at a discount.

In Ambit Finance, the liquidator can only pay off a maximum of 50% of your liabilities in any one liquidation call. The caveat to this is for accounts that fall under the Small Account Threshold and in which case they can be repaid to a maximum of 100% of your liabilies. The Small Account Threshold is defined as an account with less than 1000 USDT in liabilities.

If after a liquidation call your account remains in an unhealth position, the liquidator is able to continue liquidating until your position is healthy or has been closed out.

Terminology

In order to understand how the liquidation works, you need to understand the following terminology.

Liabilities

The Liabilities is the total debt that you have owing to the protocol. This is simply the amount that have you borrowed plus any unpaid interest that has accrued on your position. A small amount of interest is accrued on your Liabilities every second.

Borrow Limit

The Borrow Limit is the maximum amount that the protocol will lend you before considering your position to be unhealthy. The Borrow Limit is calculated based on the assets that you have supplied to your portfolio. Each asset that can be supplied to the protocol has a Maximum Loan-To-Value (LTV) ratio defined for it based on its risk analysis.

For example, if BTC was worth 20,000 USD and it had an LTV of 70%, then for each BTC you supplied to the protocol, you would be able to borrow a maximum of 14,000 USDT. Your overall borrowing limit is therefore the summation of everything you have supplied multiplied by its LTV.

Borrow Limit = SUM(Assets x LTV)

Health Score

Within the Ambit Finance protocol, a borrowers position is measured by its Health Score. The Health Score is a number between 0 and 1000 and is calculated as;

Health Score = Borrow Limit / Liabilities

When your Health Score drops below 100 you are then exposed to the risk of being liquidated. It is therefore vital that you pay attention to your Health Score and when it gets too low, start to repay your liabilities or add more assets to your portfolio.

Liquidation Discount

When a Liquidator liquidates a borrowers position, there is an economic cost to doing so. In order to make the liquidation process economically viable, the liquidator will receive more of your collateral in USD terms than the value that they paid towards your liabilies. This difference is defined as the Liquidation Discount and is a discount that is applied to the price of the asset at the time of the liquidation.

For example, if BTC was worth 20,000 and it had a Liquidation Discount of 10%, the liquidator would effectively be able to "buy" your BTC at 18,000 per BTC, therefore making a 10% profit for performing the liquidation.

Practical Examples

For the scenarios we will assume the following asset configuration.

Scenario 1

Alice has the following portfolio.

She has borrowed against her position and her liabilities are now 16,001 taking her position to an unhealty state with a health score of 99. The Liquidator is allowed to pay off a maximum of 50% of her liabilities, or 8,000 in total. In exchange for paying 8,000 off her liabilties, the Liquidator will receive 0.4444~ BTC in return.

BTC = Repayment / (Price - Discount)
BTC = 8,000 / (20,000 - 10%)
BTC = 8,000 / 18,000
BTC = 0.4444~

Alice's portfolio now looks like this.

More importantly, Alice's liabilites are now 8,000 and her Health Score has been returned to 112.

Scenario 2

Bob has the following portfolio.

He has borrowed against his position and his liabilities are now 5,701 taking his position to an unhealty state with a health score of 99. The Liquidator is allowed to pay off a maximum of 50% of his liabilities, or 2,850 in total. In exchange for paying 2,850 off her liabilties, the Liquidator will receive 3 ETH in return. In this case however, the Liquidator would only end up paying 2,700 towards the liabilties.

ETH = Repayment / (Price - Discount)
ETH = 2,850 / (1,000 - 10%)
ETH = 2,850 / 900
ETH = 3.166~

In this scenario, if the Liquidator paid 2,850 towards the position, it would need 3.166 ETH in return, however, thats more than what Bob has in his portfolio. Therefore, the liquidator ends up paying less towards the liabilties.

Repayment = MIN(3, 3.166) * (Price - Discount)
Repayment = 3 * (1,000 - 10%)
Repayment = 3 * 900
Repayment = 2,700

Bob's portfolio now looks like this.

More importantly, Bob's liabilites are now 3,001 and his Health Score has been returned to 119.

Scenario 3

Bob has the following portfolio.

He has borrowed against his position and his liabilities are now 71 taking his position to an unhealty state with a health score of 99. The Liquidator is allowed to pay off a maximum of 100% of his liabilities, or 70 in total as Bob's account is smaller than the Small Account Threshold. In exchange for paying 70 off his liabilities, the Liquidator will receive 0.1 ETH in return.

In this case, Bob's position would be closed off.