Liquidation happens when the debt-to-value ratio ("Debt Ratio") of the position exceeds certain threshold ("Liquidation Threshold"), such that the position would be closed by our liquidation bot in order to guarantee the debt repayment. It is critical to keep our lending pools safe for the long-term development of the Single Finance ecosystem, as our Pseudo Market-Neutral Strategy relies heavily on borrowing assets to minimize price effect on the farming position.
Both strategy and leveraged yield farming positions have liquidation risks. But in most cases, the strategy position will be capital-protected first instead of being liquidated. You can also reference to position opening form or your portfolio/position section for the safety buffer ("Safety Factor") of each position. The closer the safety factor to zero, the higher the risk of liquidation.
Let's learn more about our liquidation mechanism with the following example.
Alice decides to farm in TokenA-TokenB liquidity pool, when the price of TokenA is US$2 and that of TokenB is US$0.5:
- 1.Alice opens a TokenA-TokenB leveraged yield farming position, supplying 5,000 TokenA (US$10,000) and borrowing 40,000 TokenB (US$20,000) with initial leverage at 3X.
- 2.Her supplied assets and borrowed assets are then converted to 50:50 portion for creating the LP tokens, such that there are total 7,500 TokenA (US$15,000) and 30,000 TokenB (US$15,000) in her initial position. Total position value remains unchanged at US$30,000.
- 3.Current debt ratio of her position is US$20,000 / US$30,000 = 66.67%.
After 1 day, assume there are no trading fee and yield farming reward reinvested, the price of TokenA drops to US$1.5 and the price of TokenB raises to US$0.6:
- 1.Alice's position now has roughly 9,486.83 TokenA and 23,717.08 TokenB, according to Constant Product Formula (a*b = k). Total position value now becomes US$28,460.50 (i.e. 9,486.83 TokenA * US$1.5 + 23,717.08 TokenB * US$0.6).
- 2.Total debt value now becomes US$24,000 (i.e. 40,000 TokenB * US$0.6).
- 3.Now the debt ratio of this position would be US$24,000/ US$28,460.50= 84.32%.
- 4.Since the liquidation threshold of this pair is 83.33%, it will trigger the liquidation bot to close the position.
- 5.The net equity value before paying liquidation fee will be US$4,460.5. After paying 5% fee, Alice will receive 2,824.98 TokenA (~US$4,237.47) in her wallet.
Updated on 17/06/2022
Work Factor: The maximum Debt Ratio when opening a position on a pair Max. Leverage: The maximum Leverage Level when opening a new position on a pair Liquidation Threshold: The maximum Debt Ratio when the liquidation will be executed