• Loan Liquidation

Loan Liquidation

The loan liquidation mechanism that Davos Protocol implements ensures that if the TVL of the user’s collateral ever falls below the amount of DAVOS the user withdraws then their position will be liquidated. This ensures that the protocol without-fail is over-collateralized and fully backed by MATIC/ankrMATIC.

You can track if any of your positions are close to being liquidated in the web app under the Liquidation section of the navigation bar.

Liquidated positions

Liquidation Model

The liquidation mechanism is applied to ensure that DAVOS remains fully backed by MATIC collateral. When the price of your collateral goes under a certain value, the liquidation process may be triggered and your collateral may be sold in a Dutch auction.

The liquidation model is best described by the following example:

Price of 1 unit of collateral$2
Liquidation ratio66%
Price of collateral with liquidation ratio$1.32
User deposits 10 units of collateral10 * 2 = $20
Borrow limituser_deposit * liquidation_ratio = 20 * 0.66 = $13.2
User borrows $13 of DAVOS13 DAVOS
Price of 1 unit of collateral decreases and now is$1.8
Collateral unit price, with safety margin_current_price_of_collateral_unit * liquidation_ratio = 1.8 * 0.66 = $1.188
Current worth of collateral, with safety marginprice_of_colatteral_with_safety_margin * amount_of_collateral = 1.188 * 10 = $11.88
Trigger for liquidationborrowed_amount - current_worth_of_colateral = 13 - 11.88 = $1.12, which is >$0
Somebody starts a Dutch auction to liquidate the collateral.
Starter is sent tip + chip as a reward for it, from Davos reserves
5 + (14.69 * 0) = $5
User collateral that goes to Dutch auction10 units
Liquidation penalty (fixed by Davos governance)13% of the debt
Debt to cover in the auctionborrowed_amount * liquidation_penalty = 13 * 1.13 = $14.69
buf (percentage similar to liquidation penalty, fixed by Davos governance)2%
top (start auction price of 1 unit of collateral)current_price_of_collateral_unit * buf = 1.8 * 1.02 = $1.836
Auction starts and price gradually decreases.
Anybody can come and buy any amount of the liquidated collateral
tau (time in seconds until price is 0; fixed by Davos governance)21600
dur (time in seconds elapsed since the auction start; fixed by Davos governance)e.g. 600
Linear decrease of price of 1 unit of collateraltop * ((tau - dur) / tau) = 1.836 * ((21600 - 600) / 21600) = $1.785 after 600s of the auction
Somebody restarts the auction based on:
tail (specific amount of time elapsed; fixed by Davos governance)
cusp (% of price drop; fixed by Davos governance)

— 40% of top = 0.40 = $0.7344
tip (flat fee given as a reward to auction starter/restarter; fixed by Davos governance)5 DAVOS
chip (dynamic fee given as a reward to auction starter/restarter; fixed by Davos governance)0
Restarter is sent tip + chip as a reward, from Davos reserves5 + (14.69 * 0) = $5