Liquidations
A position is deemed liquidatable when the user's health factor is less than 1. This is dependent on the $collateral, the liquidation threshold of a given token chosen as collateral, and the $borrowed. This means that the user's position is no longer sufficiently overcollateralized, and thus, poses a risk to the solvency of the protocol. As such, when a user's position's health factor drops below 1, anyone can trigger said position to be liquidated, at which point the position is no longer able to be recovered and a liquidator can seize the user's assets posted as collateral by performing the liquidation. There are several things that a user can consider and do in order to prevent their position from being liquidated:
  • The volatility of the token chosen as collateral has a real impact on the changes in a user's health factor. Specifically, a highly volatile collateral, such as wFTM, will put the user at a greater risk of the collateral's price moving against him/her and reaching the liquidation price, whereas a less volatile token, such as ETH or BTC, will reduce the chances of this occurring. As such, it is essential that users carefully consider what token to post as collateral when borrowing cUSD
  • Users can control their position's health factor with the USD amount of tokens posted as collateral ($collateral) and the USD amount of cUSD borrowed ($borrowed). Specifically, by posting more collateral given a fixed amount of cUSD that the user wants to borrow, the user is able to increase their position's health factor. Following a similar logic, by borrowing less cUSD given a fixed amount of collateral that the user wants to post, the user is able to increase their position's health factor
  • Once a user's position is opened, the user can also control their position's health factor by repaying a portion of their debt in cUSD in order to maintain a healthy position. Specifically, repaying a portion of their debt in cUSD is equivalent to borrowing less cUSD given a fixed amount of collateral that the user posted, which increases a user's health factor
With these things in mind, we encourage users to exercise proper risk management when opening positions to ensure that they are not liquidated. Note that a higher health factor indicates that the position is at less risk of being liquidated.
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