Liquidation

Liquidation occurs when a borrower’s position becomes undercollateralized—meaning the value of their collateral is no longer sufficient to cover their outstanding debt.

When this happens, the protocol allows other users (liquidators) to repay a portion of the borrower’s debt in exchange for a discounted portion of their collateral. This mechanism maintains system health and incentivizes third parties to act as decentralized risk managers.

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When Liquidation Is Triggered

A borrower becomes eligible for liquidation when their health factor falls below 1.0.

Health Factor

The health factor is calculated as:

Health Factor = (Collateral Value × Liquidation Threshold) / Debt Value

• Collateral Value: The USD value of assets supplied as collateral.

• Debt Value: The USD value of all borrowed assets plus accrued interest.

• Liquidation Threshold: An asset-specific value (e.g., 80% for stablecoins, 65% for volatile assets).

If the health factor drops below 1 due to a decline in collateral value or an increase in debt, the account becomes vulnerable to liquidation.

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Liquidation Process

When a position is eligible:

1. Any user (liquidator) can call the liquidateBorrow() function on the protocol smart contract.

2. The liquidator repays up to 50% of the borrower’s outstanding debt in the same asset that was borrowed (e.g., USDC, xUSD).

3. In exchange, the liquidator receives an equivalent amount of the borrower’s collateral, plus a liquidation bonus (typically 5%).

Example

• Borrower has:

  • 1000 xUSD debt

  • 1200 USD worth of HFY as collateral

  • Health Factor: 0.95

• A liquidator repays 500 xUSD of the debt.

• The liquidator receives HFY collateral worth 525 USD (500 + 5% bonus).

• The borrower is left with:

  • 500 xUSD debt

  • 675 USD worth of HFY

The borrower can restore solvency by depositing more collateral or repaying more debt.

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Liquidation Parameters

Parameter	Value
Close Factor	Up to 50% of debt
Liquidation Bonus	5% (configurable)
Trigger Condition	Health Factor < 1.0
Liquidation Incentive	variable per asset

Each asset in the protocol has its own collateral factor and liquidation threshold, governed by protocol configuration and veHMX voting.

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Incentives for Liquidators

Liquidators earn the liquidation bonus as a reward for:

• Covering protocol risk by repaying unhealthy debt

• Paying transaction fees to perform liquidation

• Keeping the system stable during volatile market conditions

This bonus varies by asset and may be adjusted by governance.

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Transparency

All liquidation events are recorded onchain and can be verified through:

• Borrower and liquidator addresses

• Repaid debt amounts

• Collateral seized

• Block timestamp and transaction data