Liquidation
Last updated
Last updated
Liquidation is a crucial part of managing risk on any leveraged position. On Tulip Protocol, we currently have borrowing up 3x leverage. This means a user can deposit collateral and borrow up to 2x of what they have deposited and pay interest on the borrowed amount. A position will become at risk of liquidation as it approaches its debt threshold and its loan to value ratio (LTV) goes above the position maintenance requirements.
Our protocol currently runs on the following liquidation parameters:
| LTV Ratio | Liquidation Bounty (Taken from Total Position Value) | Estimated* Total Position Value Returned to the User |
|---|---|---|
Total Position Value = Debt + Collateral
*Estimated as the 10% is not guaranteed, it is the remainder of collateral after the bounty is taken. Generally at 2x, users will see around 50-60% collateral returned, 20-30% returned at 3x.
Liquidation is required when a position is unable to maintain their LTV ratio. As a user's collateral's value decreases and if it continues to drop in value, the risk of the user being unable to return the loan increases. Therefore, liquidation is required to settle the debt and ensure the lending funds are safe and lenders continue to feel confident to lend into our protocol to supply collateral for users to farm with.
Our liquidation bot will attempt to partial liquidate where possible to bring the position back to a healthy LTV. Note that in high volatility, this may not be possible and positions may still be fully closed.
Steve opens a SRM-USDC leveraged farming position using 2x leverage.
He supplies 1000 SRM (worth 3000 USDC) in collateral.
He borrows 3000 USDC (1x of his collateral)
Tulip Protocol converts all deposits and loans into a LP position: 1000 SRM + 3000 USDC
Steve's LTV ratio is 50% (debt/position value)
If SRM decreases approximately >60%, then Steve's LTV ratio will exceed 85%. A liquidation bot will call the program to close the position and settle the loan. The 5% bounty is taken from the total position value and any remaining collateral will be returned to the user.
The team will be running the first liquidation bot to ensure an orderly market at launch and to ensure positions are being liquidated in a timely manner. We will open source the liquidation bot sample code in the future.
Currently, any profit made by the team's liquidation bot will go towards an insurance fund for backstopping/possible blackswan events.
Liquidation is managed by a custom implementation utilizing Pyth oracles. This allows us to monitor LP price and values, ensuring an orderly market to avoid any bad debt being passed onto depositors.
85%
5%
10%