When users lend assets, and collateralize it to borrow other assets, the collateral is at risk of liquidation. If the price of the collateralized assets moves against the borrowed assets, it may be liquidated or sold off to repay the loan.
Users can monitor their position through their health factor. When a user's health factor falls below the liquidation threshold and their position has become unviable, they are at risk of liquidation. You can prevent liquidation, by lending out more collateral or returning your loan to stabilise your position.
The maximum amount that can be liquidated is determined by the maximum amount of collateral that can be liquidated by the protocol to repay the outstanding debt. There is no minimum amount that can be liquidated for a risky position.
Visit the Carbon Guide for more technical details on maximum liquidation amount here.
Liquidate risky positions to earn liquidation bonuses
Normally, this liquidation is done by bots to ensure the robustness and safety of the money market. However this leads to the bots monopolizing the liquidation bonuses. In the true spirit of DeFi, Demex is providing an open liquidation market for users to take part in liquidation and earn a liquidation bonus.
Anyone can become a liquidator by repaying the debt and seizing the borrower’s collateral at a discounted rate. This discounted rate is the liquidation bonus that we refer to, i.e., the difference in the actual value of the collateral and the discounted amount you pay for it.
Whenever a collateral’s health factor drops below 1, it becomes undercollateralized and anyone can liquidate the loan by repaying the debt and taking the borrower’s collateral at a discounted rate.
This discounted rate is also referred to as a liquidation bonus, the difference in the actual value of the collateral and the discounted amount the user pays for it.
The user can select the debt they want to repay as long as they have a sufficient amount in their wallet, and which collateral they want to receive in exchange for repaying the debt.