Liquidation

Collateral can be liquidated under two scenarios:

Collateral Value Depreciation: Price liquidation is governed by a DLC established during the Loan Assignment phase. If the Event Signers publish a signed attestation confirming that the BTC price has reached the liquidation threshold, the DCM uses the attestation signature to unlock the pre-signed CET. This allows the DCM to spend the BTC collateral according to the terms of the CET, thereby initiating the liquidation process and transferring the collateral to the DCM address for sale.
Default: The Event Signers regularly provides signed attestations of the date event at predefined intervals (e.g., every 24 hours). If the loan reaches its Maturity Time without repayment, the attestation corresponding to the loan’s expiration date will be used to reveal the default CET’s adaptor signature. The collateral is then transferred from the Vault to the DCM for liquidation, as dictated by the loan contract terms.

Liquidation Process

The liquidation process is designed to recover as much of the loan value as possible when a position becomes undercollateralized. The DCM plays a central role in managing risk for Liquidity Providers during this process.

The DCM performs the following tasks:

Receives Liquidated Assets: When liquidation is triggered, the DCM takes custody of the BTC collateral from the Collateral Vault.
Selling Collateral: The DCM lists the collateral for sale at current market value. A liquidation bonus (e.g., 5%) is offered to incentivize liquidators. A portion of this bonus is captured by the protocol via a reserve factor, generating protocol revenue.
Repaying the Pool: Proceeds from the sale are sent to the Lending Contract to repay the loan principal and accrued interest.
Surplus or Deficit: If there is a surplus from the sale, it is returned to the borrower to minimize the impact of liquidation. However, if the sale proceeds are insufficient to cover the loan principal, the liquidity providers incur the loss.

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Last updated 1 month ago

Liquidation

Collateral can be liquidated under two scenarios:

Collateral Value Depreciation: Price liquidation is governed by a DLC established during the Loan Assignment phase. If the Event Signers publish a signed attestation confirming that the BTC price has reached the liquidation threshold, the DCM uses the attestation signature to unlock the pre-signed CET. This allows the DCM to spend the BTC collateral according to the terms of the CET, thereby initiating the liquidation process and transferring the collateral to the DCM address for sale.

Default: The Event Signers regularly provides signed attestations of the date event at predefined intervals (e.g., every 24 hours). If the loan reaches its Maturity Time without repayment, the attestation corresponding to the loan’s expiration date will be used to reveal the default CET’s adaptor signature. The collateral is then transferred from the Vault to the DCM for liquidation, as dictated by the loan contract terms.

Liquidation Process

The DCM performs the following tasks:

Receives Liquidated Assets: When liquidation is triggered, the DCM takes custody of the BTC collateral from the Collateral Vault.

Selling Collateral: The DCM lists the collateral for sale at current market value. A liquidation bonus (e.g., 5%) is offered to incentivize liquidators. A portion of this bonus is captured by the protocol via a reserve factor, generating protocol revenue.

Repaying the Pool: Proceeds from the sale are sent to the Lending Contract to repay the loan principal and accrued interest.

Surplus or Deficit: If there is a surplus from the sale, it is returned to the borrower to minimize the impact of liquidation. However, if the sale proceeds are insufficient to cover the loan principal, the liquidity providers incur the loss.