Liquidations

Liquidation is the process of selling the collateral to repay the uTokens minted. To ensure that uTokens are fully backed by collateral, Vaults that go above the Liquidation Threshold will be liquidated. uToken issuers must constantly monitor their Vault status and adjust the collateral or repay the uTokens to avoid liquidation.

Several factors determine the amount of collateral to be sold, including the Liquidation Threshold, Liquidation Penalty, outstanding uTokens, and underlying collateral.

How Liquidations Work

When a liquidation occurs, the collateral in the liquidation position is seized and sold to repay the outstanding uTokens. The issuers will lose their collateral but may keep their minted uTokens.

Max LTV

The Loan-to-Value (LTV) ratio represents the maximum amount you can borrow against your collateral. It's expressed as a percentage of the collateral's value.

The Max LTV ratio for uTokens depends on each collateral's risk profile and is determined by governance parameters.

Example: uETH offers an 80.00% Max LTV against rsETH, allowing you to mint 0.8 uETH for each ETH contained within rsETH used as collateral.

Liquidation Threshold

The Liquidation Threshold is the percentage at which your position becomes eligible for liquidation. It's always higher than the LTV to provide a safety buffer.

The Liquidation Threshold for uTokens relative to their collateral depends on each collateral's risk profile and is determined by governance parameters.

Example: The liquidation threshold for uETH is set at 82.00%. If the outstanding amount of your uETH exceeds 82.00% of the ETH contained within your deposited collateral, the protocol will liquidate the collateral to cover the outstanding debt.

Liquidation Penalty

Liquidation Penalty is the additional cost imposed on an issuer when their collateral is liquidated because the LTV exceeds the Liquidation Threshold.

The Liquidation Penalty for issuing uTokens using collateral depends on each collateral's risk profile and is determined by governance parameters.

Fees incurred during liquidation events are added to the total repayment amount.