v2 Liquidations

Triggering Liquidation

Liquidations are triggered when a TrenBox health factor falls below 1, indicating that the collateral is no longer sufficient to cover the loan due to a decrease in collateral value or an increase in the borrowed amount. When the health factor drops below the threshold, the position becomes eligible for liquidation.

Liquidation Process

Initiation: A liquidator identifies an under-collateralized position and initiates the liquidation process.

FlashMint: The liquidator flashmints trenUSD in order to release the collateral from the TrenBox

TrenRouter: Collateral is swapped to trenUSD using external AMMs

Debt Repayment: The liquidator repays all of the borrower's debt

Collateral Seizure: In return for repaying the debt, the liquidator receives a portion of the borrower's collateral at a discounted rate, known as the liquidation bonus. This incentivizes liquidators to participate and ensures they can profit from the process.

Distribution to Backstop Providers

Liquidation fees are distributed in TREN to trenUSD providers in the backstop pool. The trenUSD in the backstop pool is not used in the liquidation process, ensuring that stakers do not lose their deposits during a liquidation unless a shortfall event occurs.

Supporters

Supporters can step in to provide additional collateral to the under-collateralized position by purchasing the reversible call option. The option specifies a strike price (the price at which the supporter can take over the position) and an expiration date. During this stage, the borrower has the opportunity to repay the debt or add more collateral to avoid liquidation. If the borrower manages to restore the health factor above 1, they can terminate the reversible call option by paying a premium to the supporter.