⚖️Liquidation & Auction

Liquidation

This mechanism is designed to ensure the safety and the solvency of the protocol when a user's collateralized position falls below a specified threshold, known as the "liquidation ratio".

This ratio is crucial, as it ensures that the value of the assets held as collateral is always sufficient to cover the value of the minted assets. If the value of the collateral falls significantly due to market fluctuations, and the collateral ratio of the position falls below the required threshold, the protocol triggers a liquidation.

Auction Discount Rate

What happens to assets subject to liquidation? When a gAsset is subject to liquidation, it is put up for auction. Interested buyers can then purchase the collateral of that asset at a discount, determined by the auction discount rate. If the auction discount rate is about 20%, then a collateral worth $100 can be obtained for $80.

Whilst you can use less collateral to mint extra gAsset tokens, there's a danger. If your collateral ratio drops too low, your position might be vulnerable to a margin call. In case you don't act rapidly by adding more collateral or reducing your gAsset amount, others can buy your collateral at a cheaper rate as soon as your position is liquidated, as mentioned above and buyers get a discount when buying this collateral.

The selling maintains till the collateral ratio is safe once more or all of the gAssets are used up. Since buyers can make an easy profit from this, they often try to buy as much as they can!

This mechanism guarantees that the protocol can recover the important funds whilst offering an incentive for buyers to participate in the auction.