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Two events cause a Borrower’s position to open for liquidation:
- 1.The decrease in value of the collateral relative to the value of the loan/debt ratio or,
- 2.The increase in value of the loan/debt ratio relative to the value of the collateral.
Liquidation occurs when a Borrower’s LTV ratio becomes greater than the Liquidation Ratio, where the collateral posted for the borrowing position is open to liquidation.
When liquidation occurs, Liquidators may repay up to 50% of the loan in the form of the borrowed virtual asset, and will receive an equal value of the assets deposited collateral plus a bonus which is deducted as a penalty from the collateral.
Liquidation Ratio is equal to LTV ratio and Liquidation threshold.
Take for example the following scenario:
- A Borrower posts 1 BNB worth $400 as collateral.
- The maximum loan-to-value ratio for BNB is 50%.
- The Liquidation Ratio is also 50%.
- The Borrower may borrow up to 200 BUSD, 50% of the value in USD of the 1 BNB posted as collateral.
The Borrower borrows 160 BUSD, making the loan-to-value ratio 40%. The value of the 1 BNB drops to $319, making the LTV ratio more than 50% The Borrower’s 1 BNB posted as collateral may now be liquidated.
Liquidations are automatic. When this occurs, Liquidators repay the loan on behalf of the Borrower in return for a discount on the assets posted as collateral.
Liquidators receive a 10% bonus deducted from the Borrower’s collateral. So, for repaying a position, they will receive 110% of that repayment’s value in the collateral virtual asset.
Therefore, Liquidators play a crucial role in the health of the Qubit Finance protocol by making payments on the Borrower’s positions that have exceeded the respective liquidation to LTV threshold. This is why we have implemented this reward system for liquidators repaying the debt made by the Borrowers. Whereupon successful completion of repayment, receive bonuses as mentioned above.
A Borrower deposits 10 BNB worth 1,000 USDT as collateral.
The maximum loan-to-value (LTV) ratio for BNB is 70%, meaning that the Borrower can borrow up to 700 USDT.
The liquidation threshold for BNB is 75%, meaning that the position may be open to being liquidated when the value of the 10 BNB drops below 933.33 USDT.
The total borrowed amount will be 700 USDT that the Borrower will take. For this example, the Borrower does not have any other borrowed assets or deposited collateral.
The value of the Borrower’s 10 BNB collateral drops from 1,000 USDT to 900 USDT, wherein the LTV ratio has gone from 70% (700 USDT / 1,000 USDT) to 77.8% (700 USDT / 900 USDT).
Now, since the LTV ratio of 77.8% has exceeded the default liquidation threshold (75% < 77.8%), causing the Borrower’s collateral to be open for liquidation.
The Liquidator steps in to liquidate the Borrower’s position. The Liquidator can repay 350 USDT for the Borrower’s outstanding 700 USDT debt (50% of the open liquidation) and will receive 350 USDT worth of BNB in return plus a 10% bonus of 35 USDT worth of BNB.
In total, the Liquidator has paid 350 USDT for 385 USDT worth of BNB, essentially buying BNB at a discount.
The 35 USDT worth of BNB bonus is deducted from the Borrower’s deposited collateral, making it a penalty for the Borrower.