Liquidation

Summary

The multi-oracle consensus algorithm we designed allows Scallop to obtain price feeds through a multi-oracle system. In the event of detecting an unhealthy asset portfolio, Scallop can accurately and promptly identify liquidation events. The integration of our permissionless liquidation system with DeepBook, Cetus, Turbos, and Umi Protocol offers seamless compatibility.

As your Risk Level approaches 100%, your account becomes susceptible to potential liquidation. The Liquidation Threshold represented is determined by specific token parameters. We calculate the liquidation threshold by considering the weighted average of all the assets you have deposited.

Scallop Liquidation BOT Github Repo (Not open-sourced yet):

https://github.com/scallop-io/sui-scallop-liquidator

Soft Liquidation

Scallop utilizes a soft liquidation mechanism to protect lenders and borrowers. Here's how scallop implements the soft liquidation process:

Collateral Factor

Scallop maintains a specific collateral factor for each asset. For example, if the collateral factor for BTC is set at 70%, borrower who has 100$ worth of BTC can have at max 70$ in debt.

Liquidation Threshold

Scallop protocol constantly monitors the value of the collateral. If the value of the collateral falls below a certain threshold, a soft liquidation process is triggered.

Liquidation Reward

To incentivize users to participate in the liquidation process, Scallop offers rewards to liquidators who repay outstanding loans and obtain the borrower's collateral at a discounted price. For example, liquidators can obtain the collateral at 95% of market price, when the liquidation reward is set to 5%.

Borrower Notification

Once the collateral falls below the threshold, Scallop initiates a period where the borrower is notified of the low collateral value and given a chance to increase their collateral or repay the loan to avoid liquidation.

Soft Liquidation

If the borrower doesn't take corrective action during the notification period, Scallop begins the gradual liquidation process. It automatically starts selling a portion of the borrower's collateral on the market to repay the lender's loan. The liquidation process continues until the loan is fully repaid or the collateral value exceeds the required threshold.

Liquidation Penalty

Scallop imposes a liquidation penalty on borrowers whose collateral is liquidated. This penalty is cut off when selling the borrower’s collateral. For example, if the liquidation penalty is 10%, then selling 100$ of collaterals, 90$ are used to payback the borrower’s debt.

Liquidation Reserve Factor

When doing the liquidation, The liquidation penalty is usually bigger than liquidation reward. Let’s say, liquidation penalty is 10%, liquidation reward is 5%, it means liquidations pay 95$ for 100$ worth of collaterals. 90$ will be used to repay debt, 5$ will go to scallop treasury. So the liquidation reserve factor is 5%.

Liquidation Scenario

In a hypothetical scenario, Kris provided $10,000 in USDC as collateral and borrowed $8,500 worth of SUI (with a collateral factor of 85% for USDC). If the value of SUI increases by 6% in a short period, reaching approximately $9,010, the risk level (debt amount / collateral * liquidation factor) rises from 94.4% ($8,500 / $10,000 * 90%) to 100.1% ($9,010 / $10,000 * 90%). At this point, Kris's account will trigger soft liquidation to reduce the risk level back to 100%.

In this liquidation event, the liquidator repaid approximately 11% of the borrower’s SUI debt, amounting to $1,000, reducing the debt to $8,010. A total of $1,100 in USDC collateral was liquidated, which included debt repayment, a liquidation reserve (5%), and a liquidation reward (5%).

After the liquidation, Kris was left with $8,900 in USDC ($10,000 - $1,100) and $8,010 in outstanding SUI debt ($9,010 - $1,000). On the other hand, the liquidator paid $1,000 worth of SUI and received $1,050 in USDC, earning a profit of $50.

Due to the liquidation, Kris’s liquidation threshold (risk level) decreased from 100.1% to 100%. If the price of SUI rises again, further liquidations will continue to be triggered to maintain the risk level at 100%.

Liquidation Guidelines

Under specific circumstances, liquidation will occur when a borrower's risk level exceeds 100% due to insufficient deposit or collateral value to cover their loan. This situation arises when the value of deposited collateral decreases or the borrowed debt value increases relative to each other.

To avoid liquidation, it is crucial to maintain awareness of your risk level and ensure sufficient margin in your account. If your risk level rises unexpectedly, you can mitigate it by increasing your collateral assets or repaying your loan. Additionally, you will soon have the option to subscribe to notifications within our app, allowing you to track and receive alerts via email or SMS when your deposits are at risk.

Scallop’s soft liquidation mechanism aims to ensure that lenders are protected even if the value of the collateral decreases. It also provides an opportunity for borrowers to rectify the situation before their collateral is fully liquidated, minimizing their losses.

It's important to note that the specific details of Scallop’s liquidation mechanism may be subject to change or updates. It's always recommended to follow up with the latest announcement on the changes of the protocol.