Liquidations
Liquidation is a critical mechanism in maintaining the health of Amply Finance. When a borrower's position becomes undercollateralized—meaning their health factor drops below 1—their loan is at risk of liquidation.
How Liquidation Works:
Undercollateralization: If a borrower's health factor falls below 1, their loan is flagged for liquidation.
Liquidation Call: Anyone can initiate a liquidation by making a liquidation call() to the Pool contract and repaying a portion or the entire loan in exchange for the borrower's collateral.
Liquidation Penalty: To incentivize liquidations and protect the protocol, liquidators receive a portion of the seized collateral as a liquidation bonus. By incentivizing liquidations, Amply Finance minimizes bad debt and maintains system stability.
Liquidation Penalty
A liquidation penalty is imposed on borrowers when their position is liquidated. This fee is a percentage of the liquidated collateral and serves two primary purposes:
Incentivizing Liquidators: The majority of the penalty is distributed to the liquidator as a reward for their role in maintaining protocol health.
Protocol Revenue: A portion of the penalty is allocated to the protocol's treasury.
Example:
If Ally borrows 80 vUSD against 100 vETH collateral (assuming both assets are valued at $1) and her position is liquidated, a liquidator who repays 40 vUSD of her debt would receive:
40 zkUSD: The repaid debt amount.
A liquidation penalty (e.g., 5%) on the seized collateral (40 zkUSD * 0.05 = 2 zkUSD).
In total, the liquidator would receive 42 zkUSD.
Important Note:
The specific liquidation penalty percentage can vary based on the collateral asset and other protocol parameters.
Variable Close Factor
Close factor is defined as the maximum amount of debt a liquidator can repay per transaction. For example, a close factor of 50% means that a liquidator can pay off up to half a borrower’s loan at one go.
On Amply, this close factor is variable depending on a user’s Health Factor. Typically, a liquidator can repay up to 50% of a borrower's debt (close factor of 50%). However, a close factor of 100% will be applicable if HF < 0.95. This means that up to 100% of a borrower's debt can be liquidated if his health factor drops below 0.95.
Reserve Factor
Amply sets aside a Reserve Factor - a percentage of interest that is to be allocated to the ecosystem treasury. A riskier asset typically has a higher reserve factor
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