# Liquidation

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 Asset | Collateral Asset | Liquidation Threshold | Liquidation 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.