According to unique parameters set for each lending market, a user can borrow a maximum value amount in relation to the value of provided collateral. If this ratio changes due to the market, a borrower account can become unhealthy (health factor <= 1), with the value of borrowed assets crossing a threshold known as the Liquidation Threshold. When this threshold is crossed, it means the value of borrowed assets is greater than the acceptable limit compared to the value of provided collateral. In this situation, a borrower may be subject to liquidation. This threshold can be crossed in two scenarios: if the borrowed assets appreciate in value, or if the collateralized assets decrease in value.

How Liquidation Works

The blockchain nature of smart contract-powered lending protocols naturally leads to a transparent ecosystem. This means that while accounts are private โ€“ in that, there is no information to tie accounts to the owner identity โ€“ anyone can see the health of accounts on the Kinza Finance system. When a loan becomes unhealthy (health factor <= 1), and the collateral value no longer exceeds the necessary threshold, it will automatically be designated as such. A liquidation is then required to return the borrower to a healthy LTV ratio (learn about LTV here). Liquidators can monitor accounts and see what accounts require liquidations, as well as accounts that may be close. During a liquidation, liquidators will purchase a portion of a borrowerโ€™s loan at a discount. Liquidators are encouraged to be first and take advantage of these discounts. Once this occurs, the borrower has reduced their debt, and the collateral they provided is now sufficient to return their account to a healthy status.

Liquidation Penalty

The Liquidation Penalty is a fee paid by the borrower due to a liquidation for the value of collateralized assets. Each asset has a unique Liquidation Penalty determined according to underlying asset risk analysis. Details and asset-specific liquidation penalty information are displayed when a borrower selects an asset to loan.

Efficiency Mode, or e-mode, has unique parameter configurations with lower liquidation penalties. Learn more about Efficiency Mode here.

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