Core to a Borrowing Protocol
Liquidation is a process to maintain the borrower’s solvency when the collateral decreases in value or the borrowed debt increases in value against each other. In a liquidation, up to 100% of a borrower’s debt is repaid and that value + liquidation fee is taken from the collateral available, so after liquidation, the amounts liquidated from your debt is repaid. On Prestare, when the account’s Actual LTV meets the liquidation threshold, one will be liquidated and Prestare provides three approaches to process the liquidation.
The liquidation threshold is the percentage at which a position is defined as under-capitalized. With CRT, the liquidation threshold(LT) of a collateral asset i is defined as:
The Actual LTV is defined as:
The value of CRT will be determined at the commencement date of the loan and not be influenced by the fluctuation of the market price of CRTs.
Internal liquidation is a unique liquidation mechanism of Prestare. Since not all the CRTs in the credit reserve pool are used in the under-collateral process and every CRT is backed by stablecoins. The collection of all the outstanding CRTs can be seen as an internal liquidator for Prestare.
When a loan meets the liquidation condition, Prestare will first confirm the number of idle credit tokens. Then Prestare will use the stablecoins in the credit reserve pool to repay the default loan and the corresponding CRTs will be burnt. Finally, the default loan’s collateral will be transferred into stablecoins and saved into the credit reserve pool. The bonus CRT will be sent to the CRT stakers in proportion to the percentage of liquidity they provide in the pool.
Apart from that, liquidity providers can choose to use their deposits to buy liquidated assets. This is designed to absorb debt from liquidations, and reward depositors with the liquidated collateral shared between depositors in proportion to their deposit size.
Any depositor can place a bid on the liquidated assets they want to get including stablecoins and other tokens. Since liquidations are expected to occur at a loan-to-value of above 100% in even extreme situations, depositors can expect to receive a net gain from all liquidations. The higher the premium you place the bid, the more you will earn when the bid is filled but the less chance the bid is executed. In this way, depositors can swap deposits into their favourite assets with discounts and save gas fees and slippages which occur on DEX, while enjoying saving interest on Prestare.
External liquidation is a very important part of the DeFi lending ecosystem, by giving external liquidators liquidation incentives, lending protocols maintain their liquidity. In Prestare, liquidators can also reap liquidation rewards by helping to repay debts that reach the liquidation threshold. However, Prestare may have undercollateralized debt, when external liquidators liquidate this part of the debt, they can receive a certain amount of CRT as compensation for the liquidation reward.
Example: The CF of ETH collateral is 0.8. Bob supplies 1 ETH (priced at $1000 at the time of borrowing) and he has already accumulated 507.8997CRTs on Prestare from previous borrowings. Bob borrows the maximum amount of USDT allowed with all the CRTs is 1200 (see example in 3.1). the CRT value in this loan is equal to 𝑇𝑜𝑡𝑎𝑙𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 − 𝐶𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙 ∗ 𝐶𝐹 = 400; His liquidation threshold is 1200 / (1000+(1200−1000∗0.8) = 12/14 which equal to the Actual LTV. If the value of ETH collateral drops to $800, then we calculate his new actual LTV:
His loan will be eligible for liquidation. A liquidator can repay up to 100% of a single borrowed amount. If they decide to repay 50% of this under-capitalized loan, which is equal to = $600 worth of ETH. In return, the liquidator can claim single collateral which is ETH (8% bonus). The liquidator claims $600 ∗ (1 + 0.8%) = $648 worth of ETH for repaying $600 worth of USDT.
Users can use the flash loan function to liquidate their loans at any time before anyone else does. To be more specific, users can lend certain amounts of assets through flash loans and repay their loans, then redeem the collateral and pay back the flash loan. Prestare has packed this process into a very simple API which users can easily make self-liquidation.