Liquidations & Risk Management

How the Tydro Protocol operates to manage risk through an open market liquidation process

Overview

Liquidation keeps every market solvent by closing positions that fall below their safety threshold. Tydro uses the Aave V3 permissionless liquidation model.

Health Factor

Each borrow position has a health factor, which represents a position's collateral value relative to its debt and distance from liquidation. Positions with a Health Factor below 1 can be liquidated.

$$\text{Health Factor} = \frac{\sum \left( \text{Collateral} \times \text{Liquidation Threshold} \right)}{\text{Total Debt}}$$

When liquidations occur

While the Health remains above 1, the position can not be liquidated. When it reaches 1 or below, the position becomes eligible for liquidation. A health factor drops for two reasons: collateral falls in value, or debt grows as interest accrues.

How a liquidation runs

1. A position's health factor reaches 1 or below
2. A liquidator repays part of the outstanding debt on the position's behalf
3. In return, the liquidator receives an equal value of the position's collateral, plus the liquidation bonus
4. The repayment lowers the debt and lifts the health factor back above 1

Liquidation is permissionless. Anyone running a bot can participate to earn the liquidation bonus.

Avoiding liquidation

Add collateral or repay debt to raise the position's health factor before it reaches the threshold. Borrow at a manageable LTV and monitor your positions actively in times of market stress.

OTC loan liquidations

OTC loans have LT and LTV triggers negotiated and managed at the custodian level, and do not directly interact with the Tydro smart contracts for permissionless liquidations like other markets.