This help page explains how cryptact handles Aave’s Liquidation (forced liquidation) within its DeFi functionality.
1. About Liquidation in Aave
Aave is a DeFi lending platform that allows users to lend and borrow cryptocurrencies without intermediaries like exchanges. Users can use the cryptocurrencies they deposit as collateral to borrow other cryptocurrencies. However, if the value of the collateral decreases and falls below the required threshold, a forced liquidation occurs.
2. Cryptact’s Handling of Liquidation
The following example has been created to explain the processing in cryptact, and it differs from the actual calculations and figures in Aave. Please be aware that the results may vary depending on factors such as collateral ratio and fees, and also where only partial liquidation occurs.
Example: Assuming you can borrow up to 80% in USDC on Aave.
You provide 1 BTC as collateral when the value of BTC is 65,000 USDC and borrow 52,000 USDC.
However, the price of BTC drops to 60,000 USDC, resulting in insufficient collateral, so you can now borrow only up to 48,000 USDC.
Another user liquidates your position, using the collateral to repay your debt. The liquidation process is as follows:
1. Recover 1 BTC (Transaction Type: /RECOVER)
This is an action performed by the liquidator. The liquidator recovers the borrower’s collateral, which is 1 BTC.
2. Sell 1 BTC for 60,000 USDC (Transaction Type: SELL)
This is an action performed by the liquidator. The liquidator sells the recovered 1 BTC on the market, obtaining 60,000 USDC.
3. Repay 52,000 USDC to settle the debt (Transaction Type: RETURN)
This is an action performed by the liquidator. Out of the 60,000 USDC, the liquidator uses 52,000 USDC to repay the borrower’s debt.
4. 8,000 USDC loss (bonus paid to the liquidator) (Transaction Type: LOSS)
The person providing the collateral incurs a loss. Out of the 60,000 USDC, 52,000 USDC is used to repay the debt, and the remaining 8,000 USDC is given to the liquidator as a bonus.