Liquidation

Liquidation is a mechanism in Decentralized Finance (DeFi) lending protocols that automatically closes a borrower's position when the value of their collateral falls below a certain threshold. This protects protocol from bad debt and ensures the debt gets repaid.

Here's the situation:

• In Chad Finance, the maximum amount you can borrow (debt threshold) is based on the minimum collateral ratio of two assets in your holding.

• Collateral ratio is the value of the loan you get compared to your collateral

• If the price of either asset falls, the total value of your holding goes down.

What this means:

• A drop in asset price reduces the maximum loan you can get (debt threshold) because the collateral value has decreased.

• If your current loan amount is higher than the new debt threshold, your position is at risk of liquidation. Liquidation means selling off your assets to repay the loan.

Your position is now available for liquidation. Any interested party can repay the borrowed amount in CUSD. The liquidator will receive an additional 10% of the borrowed amount from the collateral, with the remainder being returned to the borrower.

Impact:

• Borrowers lose some of their collateral .

• Liquidators earn a small profit by receiving extra collateral.

Remember:

• Liquidation helps maintain the stability of DeFi lending protocols by mitigating lender risk.

• Borrowers can manage liquidation risk by repaying loan and monitoring market volatility.