Liquidation Process

Overview of how liquidations are handled

Introduction

Liquidations are a critical aspect of maintaining the stability and solvency of the BlonkFi platform. They ensure that the platform can recover borrowed funds when the value of a borrower’s collateral falls below a predefined threshold. The following detailed process outlines how liquidations are handled step-by-step within the BlonkFi ecosystem.

Step-by-Step Liquidation Process

1. Monitoring Collateral Value:

   • Market State Monitoring: The platform continuously monitors the market value of collateral assets deposited by borrowers. This is done using real-time price feeds and oracles.

   • LTV Ratio Check: The Loan-to-Value ratio, which is the ratio of the loan amount to the collateral value, is periodically checked. The acceptable LTV ratio is set by the Limiter Module and varies based on market conditions and liquidity.

2. Triggering a Liquidation Event:

   • Threshold Breach: When the LTV ratio exceeds the maximum allowable threshold, a liquidation event is triggered. For example, if the acceptable LTV is 70% and the collateral value drops such that the LTV becomes 75%, liquidation is initiated.

   • Safety Mechanism Activation: The Moon Module plays a role in this phase by utilizing the options it holds to mitigate the potential losses due to market downturns.

3. Liquidation Execution:

   • Borrower Notification: The borrower is notified of the impending liquidation.

   • Selling Collateral: The platform initiates the sale of the borrower's collateral. The sale is conducted in a way to minimize market impact and recover the maximum possible value.

     • Seeding Options: The Moon Module’s options may be exercised or sold to cover the shortfall. This helps in mitigating the losses if the collateral value has dropped significantly.

4. Repayment of Loan:

   • Debt Settlement: The proceeds from the collateral sale are used to repay the outstanding loan amount.

   • Fee Deduction: Any applicable fees, such as the Safety Fee and Deposit Fee, are deducted from the proceeds. The Safety Fee is paid to the foundation, and the Deposit Fee may be returned to the borrower upon successful loan repayment.

5. Post-Liquidation Handling:

   • Remaining Funds: If there are any remaining funds after repaying the loan and deducting fees, these are returned to the borrower’s account.

   • Deficit Handling: If the collateral sale does not cover the full loan amount, the platform may absorb the loss or take further actions based on predefined risk management protocols.