Liquidations
Profit from the safeguarding of bad debt
What are liquidations?
A liquidation event occurs when a borrower's Health Factor drops to 1, indicating eligibility for liquidation. This process allows liquidators to seize control of the borrower's collateral, sell it, and utilize the proceeds to repay the outstanding debt while earning a liquidation fee.
Why is it important?
Liquidations are crucial to Tren Finance as they maintain the protocol's solvency and ensure the stability of its collateral-backed stablecoin, trenUSD. When a borrower's position becomes under-collateralized due to market fluctuations or asset depreciation, liquidations act as a safeguard by reclaiming and selling the collateral to cover the outstanding debt. This process prevents systemic risks and protects lenders by ensuring that all trenUSD in circulation remains fully backed by sufficient collateral. Moreover, liquidations incentivize borrowers to maintain healthy collateralization ratios, thereby promoting responsible borrowing and lending practices within the platform. Ultimately, liquidations uphold the integrity and reliability of Tren Finance, fostering trust and stability in the decentralized finance ecosystem.
How does it work?
Tren Finance currently employs a full-collateral liquidation approach. When a position is flagged for liquidation, a liquidator seizes the borrower's entire collateral to settle their borrowing position. After the liquidation event, the liquidated borrower retains only the amount of trenUSD they initially borrowed.
Initially, the stability pool is used to absorb the liquidation, utilizing a liquidity backstop of trenUSD provided by stability providers. This mechanism allows stability providers to use their trenUSD to acquire discounted collateral. In the v2 model of our liquidations, the stability pool is replaced with a backstop pool, and liquidations are handled by external actors. This change enables the implementation of reversible call options for incentivized liquidation mitigation.
How can I protect myself from being liquidated?
Regularly monitor the health factor of your TrenBox to ensure it remains well above 1.00. Maintaining a higher health factor provides a buffer against market volatility and price fluctuations of the collateral asset.
If the value of your collateral decreases or you have borrowed close to the maximum allowed amount, consider adding more collateral to your TrenBox. This will increase your collateralization ratio and reduce the likelihood of liquidation.
Additionally, repaying a portion of the borrowed trenUSD can improve your health factor. This is particularly useful if the value of your collateral has decreased and you are near the liquidation threshold.
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