Liquidations
In Kinetic, liquidations occur to maintain the stability of the platform and to protect the interests of all users. When a borrower's collateral falls below the required threshold, a portion of their supplied assets is liquidated to repay the outstanding loan. This process ensures that the platform remains solvent and that borrowers do not accrue unmanageable debt.
How Liquidations Happen
Health Factor Monitoring: Each borrower's health factor is continuously monitored. The health factor is a numerical representation of the borrower's collateralization level.
Triggering Liquidation: When the health factor is equal to or falls below 1, it indicates that the borrower's collateral is insufficient to cover their borrowed assets. At this point, liquidation is triggered.
Liquidation Process: During liquidation, up to 50% of the borrower's supplied assets are sold off to repay a portion of their outstanding loan. This is designed to bring the health factor back to a safer level above 1, as the borrower had been over-collateralized.
Details of the Liquidation Process
Collateral Sale: The protocol will automatically sell a portion of the borrower's supplied assets. This sale is conducted on the open market, and the proceeds are used to repay the borrower's loan.
Repayment of Debt: The amount of collateral liquidated will be equivalent to 50% of the total value required to cover the loan. This partial liquidation ensures that the borrower still retains some collateral, which can appreciate in value over time, while restoring their health factor to above 1.
Liquidation Penalty: A liquidation penalty will be applied during the liquidation process. This penalty incentivizes other users to participate in the liquidation process and compensates for the risk they are taking.
Benefits to the User
Prevents Insolvency: By liquidating a portion of the collateral, Kinetic helps prevent the borrower from becoming completely insolvent, thereby avoiding the potential for total asset loss.
Maintains Solvency of the Platform: Liquidations help maintain the overall solvency of the Kinetic platform, ensuring that all users' funds are protected and that the platform can continue to operate smoothly.
Reduces Borrower's Risk: By automatically managing the liquidation process, the platform reduces the risk for borrowers. They do not have to constantly monitor their collateral levels, as the system will take action to protect their interests.
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