💦Liquidation

Keeping the liquidity protocol liquid

Liquidations are a vital component of all DeFi money markets, ensuring that depositors do not incur bad debt that can affect the health of the whole protocol.

Coupon Finance implements partial liquidations that only liquidate until the liquidation target is met, lessening the penalty for borrowers who mismanaged their funds.

Conditions

Liquidations can occur on two occasions.

  1. Debt outstanding after coupon expiry

  2. LTV exceeding the liquidation threshold

Debt Outstanding after Coupon Expiry

When the coupons expire, and the debt is still unpaid, to make the depositors whole, these loan positions must be liquidated until all the debt is repaid. To avoid such an incident, borrowers must remember to repay their debts before expiry or buy coupons to lengthen the loan duration.

LTV Exceeding the Liquidation Threshold

Coupon Finance assigns a liquidation threshold for each asset pair depending on the volatility. When a loan of an asset is given out, it must be overcollateralized with a different asset, and the LTV must be lower than the liquidation threshold set for that asset pair. Borrowers must repay their debt or add more collateral before the LTV becomes too high to prevent liquidations.

Loan AssetCollateral AssetLiquidation ThresholdLiquidation Target

ETH

wstETH

95%

90%

ETH

USDC

80%

70%

ETH

USDT

80%

70%

ETH

ARB

80%

70%

USDC

wstETH

80%

70%

USDC

USDT

95%

90%

USDC

ARB

80%

70%

ARB

wstETH

70%

60%

ARB

USDC

70%

60%

ARB

USDT

70%

60%

Liquidation Fee

Liquidations on Coupon Finance can be performed permissionlessly and are monetarily incentivized via a liquidation fee. When a liquidation is performed, 2% of the collateral liquidated is collected as a fee, of which 0.5% goes to the protocol. Since a part of the debt is repaid, coupons to secure the loan are unlocked and given to the borrower. The borrower can either use the coupons to borrow again, or sell it to get back to retrieve a part of the interest paid earlier.

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