Liquidation

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Liquidation
A user can be liquidated when their borrow value has exceeded their max borrow.
Understanding liquidation
Borrowed and Max Borrow are dollarized amounts representing how much value a user has borrowed, and their maximum allowable borrow, respectively.
Borrow Utilization = Borrowed  ($) / Max Borrow ($)
A user's Borrowed is calculated by summing Borrowed Amount * Price over their borrowed assets.
A user's Max Borrow is calculated by summing Collateral Amount * Price * Collateral Factor over their collateral assets. Collateral factors represent what percentage of assets a user can borrow against their collateral.
A user can only be liquidated when their Borrow Utilization exceeds 100%.
User with Borrow Utilization near 100%, they will soon be at risk of liquidation.
Liquidation example
A user liquidates (the "liquidator") another user (the "liquidatee") by repaying up to 50% of the liquidatee's borrow and seizing their collateral at a discount. To give an example, let's say a user supplied 30 algos and borrowed 20 USDC.
Asset Collateral Factors
Asset
Collateral Factor
Liquidation Incentive
USDC
80%
7.5%
ALGO
50%
7.5%
Initial Asset Prices
Asset
Price
USDC
1.00
ALGO
1.75
Liquidatee Initial State
Asset
Supply
Borrow
USDC
0
20
ALGO
30
0
The liquidatee's initial Borrowed = 20 * $1.00 = $20 and initial Max Borrow = 30* $1.75 * 0.50 = $26.25, therefore initial Borrow Utilization = $20 / $26.25 = 76.2%.
Now, suppose the asset prices change as tabulated below.
Final Asset Prices
Asset
Price
USDC
1.00
ALGO
1.30
As the price of ALGO decreases to $1.30, the user's Max Borrow falls to 30 * $1.30 * 0.50 = $19.5, and the Borrow Utilization rises to 102%, which means the user can now be liquidated.
A liquidator identifies this and calls liquidate on the liquidatee via the Algofi smart contracts. The liquidator is allowed to repay up to 50% of the liquidatee's USDC Borrow.
In exchange for repayment, the liquidator seizes a fraction of the liquidatee's ALGO collateral at a discount. If the liquidator repays a full 50% of the 20 USDC Borrow, 10 USDC tokens, then the liquidator seizes $10 * (1 + Liquidation Incentive) = $10.75 worth of ALGO from the liquidatee.  This amounts to $10.75 / $1.30 = 8.27 ALGO.
Afterwards, the liquidatee has a Borrow of 10 USDC vs. a Collateral of 30 - 8.3 = 21.7 ALGO. The liquidatee's borrow is $10 and Max Borrow is 21.7 * $1.30 * 0.50 = $14.1 for a Borrow Utilization of $10 / $14.1 = 71%, under the 100% threshold.
What is the purpose of liquidation?
Simply put, liquidation keeps the Algofi protocol solvent by incentivizing liquidators to repay the loans of liquidatees whose Borrow Utilizations have risen past 100% for one or more of three key reasons:
Collateral prices fell quickly causing Max Borrow to fall below Borrow
Borrow prices rose quickly, causing their borrow value to exceed Max Borrow
Borrow interest caused their Borrow to rise above Max Borrow
How to liquidate
The ability to liquidate is available in the Python SDK.
Repaying Borrows
Risks
Last modified 4mo ago
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Outline
Understanding liquidation
Liquidation example
What is the purpose of liquidation?
How to liquidate