Liquidations
Learn how to participate in the liquidations market
This documentation is a work in progress!
Overview
Liquidations of unhealthy CDP's within the protocol can be done by anyone and the protocol incentivizes it.
Liquidators must obtain equal amount of the Kresko Asset repaid on behalf of the liquidatee. These Kresko Assets are burned and the debt balance of the liquidatee is reduced accordingly. Protocol then calculates the amount of collateral to seize, removes it from the liquidatees collateral deposits and transfers it to the liquidators address.
When a liquidator repays debt on the unhealthy CDP, in return they receive the liquidatees collateral at a discount according to the Liquidation Incentive. This rewards the liquidators in exchange for the repayment cost and effort.
Liquidation Threshold
Thing to understand in liquidations is the difference between Liquidation Threshold (LT) and the Minimum Collateralization Ratio (MCR).
An account in the protocol is considered liquidatable when the ratio of collateral to debt is less than the LT. MCR is used to decide whether the CDP is allowed to take on more debt. While MCR is similar to the LT, it won't make an account liquidatable. The possible gap between these ratios is a safety buffer and it prevents users from creating extremely risky positions which would get liquidated in the slightest market movement.
TL;DR
Accounts can be liquidated below LT.
Accounts can only be liquidated up to the MLR.
Acquiring Kresko Assets
Three main options exist to natively acquire Kresko Assets.
Borrowing the assets from the protocol against collateral.
Provide underlying assets for a 1-1 synth wrap.
Buy the assets from some 3rd party AMM liquidity.
Liquidation call does not touch liquidators debt, as it would be a double spend.
This means using the protocol to acquire Kresko Assets will leave the liquidator with a regular CDP after the liquidation call.
All protocol code is public on GitHub
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