Liquidation Mechanism

The liquidation module is a critical component required as a prevention mechanism for bad debts, by paying off loans that have gone beyond its required Collateralization ratio.

Health Factor

The health factor represents the safety of your deposited assets against the borrowed assets/ minted SuTokens and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario.

If the health factor reaches 1, liquidation of your deposits will be triggered. A Health Factor below 1 can get liquidated.

The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.

Liquidation Threshold

In a compound design,

Liquidation Threshold = Collateral Rate or LTV

Liquidation

Liquidation will be triggered when;

Value of Borrowed Asset or Minted SuTokens x LTV/ Collateral Rate
 > 
 Value of Supplied Collateral 

This is either because the collateral decreases in value or the borrowed loan/ minted SuToken increases in value against each other.

When a liquidation event is triggered, the following events take place:

• The liquidation module will calculate the amount, up to the given asset's Close Factor, required to bring the loan back to a healthy level (i.e. as per the stipulated Collateral Factor)

• A corresponding amount will then be taken from the collateral, calculated at the collateral’s current market price minus a liquidation discount, netted off by a liquidation fee.

• After the said loan amount is repaid, the loan account will be considered a healthy account (within the Collateral Ratio), and will be taken off the liquidation module

Anyone can participate as a liquidator for Sumer, as long as they are in possession of the corresponding collateral assets.

IMPORTANT NOTES:

1. Within Sumer, 1 suUSD = 1 USD. Though suUSD mint from stables (USDC, USDT, DAI) have high collateral rate, aggressive minting can get liquidated if price of collateral drops. This is specially applicable in adverse market conditions (e.g. when USDC lost peg)

2. Within Sumer, 1 suETH = 1 ETH. By corollary, Minting suETH with ETH collateral cannot get liquidated

Liquidation Incentive

The liquidation discount acts as an incentive for arbitrageurs to step in and reduce the borrower’s exposure, thereby reducing the risk of loan default in the process.

The amount of liquidation discount (or penalty for borrowers) depends on the asset used as collateral.

This liquidation process will be facilitated using the Chainlink price feed (i.e. “oracle”) or supported Oracle service on networks where Sumer is deployed.