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A liquidation is a process that occurs when a borrower's Health Factor is reduced to 1 or lower due to their collateral value not properly covering their loan/debt value. This might happen when the collateralized asset decreases or the borrowed debt increases.
To reduce the risk of liquidation, you can repay any outstanding loans or deposit additional collateral to increase your Health Factor.
Liquidators are advanced DeFi users that have developed automated systems (ie. bots) to monitor collateralized positions and seek out loans that are eligible for liquidation. These bots then interact with the protocol's L2Pool contract and initiate a
This enables Liquidators to pay back part of the debt owed and receive discounted collateral in return (also known as the liquidation bonus).
This liquidation mechanism incentivizes third parties to participate in the health of the overall protocol by acting in their own interest (to receive the discounted collateral) and as a result, ensure that borrows are sufficiently collateralized across the protocol.
- Roger deposits 10 ETH and borrows 5 ETH worth of DAI
- If Roger’s Health Factor drops below 1, his loan will be eligible for liquidation
- A liquidator can repay up to 50% of a single borrowed amount (in this case, 2.5 ETH worth of DAI)
- In return, the liquidator can claim a single collateral, which is ETH, at a 7.5% bonus
- The liquidator claims 2.5 + 0.1875 ETH for repaying Roger's bad debt (2.5 ETH worth of DAI)
- 0.1875 ETH is claimed by the protocol at a 7.5% bonus (15% total penalty)
- After liquidation, Roger has 7.125 ETH (10-2.5-0.1875-0.1875 ETH) of supplied ETH collateral and 2.5 ETH worth of DAI borrowed.
The total liquidation penalty is 15%. Half of the penalty (7.5%) is allocated as a bonus to liquidators, while the other half is earmarked towards the Radiant Growth Fund, enabling the DAO to fund initiatives without having to sell RDNT tokens on the open market.
Each asset within Radiant Capital has specific values related to its risk, which influences how they are supplied and borrowed.