If a borrower’s total collateral value falls below the value required to meet the liquidation ratios for the assets that they are borrowing then the liquidation process may be triggered. This might happen when the collateral value decreases relative to the value of the borrowed asset.If liquidation does occur, up to 50% of a borrower's debt is repaid by the liquidator and that value, plus a liquidation fee is taken from the collateral available. This process reduces the remaining debt to be repaid, however, the borrower has incurred the additional liquidation fee. This liquidation fee depends on the asset that is used as collateral and details of these can be found in the risk parameters section of this documentation.

Liquidation Example

  • Charlie deposits 10 ETH as collateral against a USDC loan which is valued at 6 ETH giving a loan to value ratio (LTV) of 60%

  • ETH has a maximum LTV of 80% and a liquidation threshold of 82.5% which makes Charlie’s loan acceptable

  • However, if the value of ETH falls with respect to USDC such that the LTV becomes greater than 82.5% then Charlie may be liquidated

  • A liquidator chooses to repay the maximum 50% of Charlie’s loan this being 3 ETH worth of USDC and in return claims a liquidation fee of 5% (0.15 ETH)

  • The total cost of the liquidation will be 3.15 ETH and this will be taken from the 10 ETH of collateral provided by Charlie. This will leave Charlie with 6.85 ETH of collateral and a remaining loan of 3 ETH bringing the residual loan LTV ratio below the liquidation threshold

How to avoid liquidation

In the above example, Charlie could have avoided liquidation by maintaining a strong health factor. This can be achieved by depositing more collateral assets or by repaying part of the loan. Users should note that loan repayments increase your health factor by more than deposits.We recommend Meridian Lend users maintain proper risk management when borrowing. Make sure to monitor your health factor and keep it high to avoid liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid liquidation.

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