Liquidation Process
At Bima protocol, the liquidation process is designed to protect the overall health and stability of the platform while ensuring users can borrow and leverage their crypto assets responsibly. Here's an overview of how the liquidation process works:
Collateralized Borrowing Users can deposit assets such as BTC or LST into their vaults as collateral and borrow USBD stablecoin against that collateral. The amount users can borrow is determined by the collateral ratio, which ensures the borrowed USBD remains backed by sufficient collateral.
Collateralization Ratio To maintain the integrity of the system, users must uphold a specific collateralization ratio (e.g., 225%). This ratio ensures that the value of the deposited collateral is always higher than the amount borrowed in USBD. If the collateralization ratio falls below the required threshold due to market fluctuations, the position is considered at risk of liquidation.
Monitoring and Alerts Bima protocol monitors the collateralization ratio in real-time. When a user's ratio approaches the liquidation threshold, the platform may trigger automated alerts, notifying the user that their position is in danger. This gives the user an opportunity to either repay a portion of their debt or add more collateral to restore a healthy ratio.
Triggering Liquidation If the collateralization ratio falls below the required threshold and the user does not take action, the platform initiates the liquidation process. During liquidation, a portion of the user's collateral is sold to repay the outstanding USBD debt and bring the position back to a safe ratio. The exact amount of collateral liquidated depends on the debt that needs to be covered and the platform's liquidation penalty.
Liquidation Penalty When a liquidation occurs, a penalty is applied, meaning that the liquidated collateral is sold at a discount to incentivize other users or liquidators to participate in the process. This ensures that the liquidation is completed efficiently, but it also means the user may lose more collateral than initially anticipated.
Restoring Health to the System Once liquidation is triggered and completed, the user's remaining collateral (if any) remains in their vault, and the system's stability is restored. The debt is repaid using the proceeds from the liquidated collateral, and the user can continue interacting with their vault, albeit with reduced collateral.
User Protections Bima protocol strives to minimize liquidations by providing users with tools such as collateral ratio monitoring, margin call alerts, and the option to deposit additional collateral at any time. Users are encouraged to maintain healthy collateralization ratios to avoid the risk of liquidation and ensure the safety of their funds.
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