Liquidation

What are liquidations?

Liquidations occur to ensure that the entire stablecoin supply remains fully backed by collateral. Vaults that fall below the minimum collateral ratio of 110% are closed (liquidated). The debt of the liquidated vault is absorbed by the Balancer Pool, and its collateral is distributed among Balance Providers. The owner of the vault keeps the full amount of borrowed $AXUSD but loses about 10% of the collateral value, making it crucial to maintain a collateral ratio above 110%, preferably over 180%.

How it works

Anyone can liquidate a vault once it drops below the Minimum Collateral Ratio of 110%. The initiator receives gas compensation of 200 $AXUSD plus 0.5% of the vault's collateral as a reward for this service.

Liquidating a vault incurs gas costs, which the initiator must cover. To keep liquidations profitable even during high gas prices, the protocol offers gas compensation. This compensation is 200 $AXUSD plus 0.5% of the vault's collateral, calculated as follows:

[ \text{Gas compensation} = 200 , \text{AXUSD} + 0.5% \text{ of the vault's collateral} ]

The 200 $AXUSD is funded by a Liquidation Reserve, while the 0.5% comes from the liquidated collateral, slightly reducing the gain for Balance Providers.

Liquidation Reserve

When you open a vault and draw a loan, 200 $AXUSD is set aside as a Liquidation Reserve to cover gas costs in case your vault is liquidated. If your vault is not liquidated, this reserve is fully refundable and returned to you when you close your vault by repaying your debt. The Liquidation Reserve counts as debt and is considered when calculating a vault's collateral ratio, slightly increasing the actual collateral requirements.

What happens if my vault gets liquidated?

If your vault is liquidated, you lose your collateral, and your debt is paid off through the liquidation process. You will not be able to retrieve your collateral by repaying your debt. This results in a net loss of your collateral’s dollar value.