Health & Liquidations
Health is a numeric indicator of the safety of a user’s collateralized position and represents the ratio between total deposited collateral and the total loan value.
When Health falls below 1, a liquidation is triggered.
This means that a portion of the user’s collateral is automatically sold to repay their loan and cover any associated fees. For example, in BENQI's Core Markets, if the collateralization ratio for AVAX is 50%, this means you can borrow up to 50% of the value of your AVAX deposit. If AVAX falls significantly in price, a liqudation may be triggered.
A higher Health value means the collateral is safer from liquidation. Health decreases when collateral loses value or when the borrowed debt increases.
To improve Health, users can repay part or all of the borrowed amount or add more collateral. The protocol also displays Health status using color-coded indicators:
Health > 2 (Green): Collateral is safe from liquidation.
Health < 1.99 (Orange): Caution, collateral may be at risk.
Health < 1.1 (Red): High risk of liquidation.
Health < 1: Liquidation will occur.
For example, a user may have lent out AVAX to borrow $100 of another asset. If the AVAX is now worth $108, their ratio would be 1.08, and in the Red zone approaching liquidation.
Liquidations In Action
When a position's Health falls below 1, a portion of the collateral will be liquidated to restore the loan to a safer position.
BENQI uses a Close Factor, which limits the portion of the debt that can be repaid in a single liquidation transaction. For example, if the close factor is set to 50%, only up to 50% of the user’s debt can be liquidated at once. This prevents the total debt from being repaid in a single liquidation, allowing the user to retain some collateral and avoid complete liquidation of their assets.
Upon liquidation, liquidators repay a portion of the debt, and BENQI sells the corresponding amount of collateral. This includes a Liquidation Incentive (usually 10%) to reward liquidators, added to the amount of collateral taken. For example, if $50 of debt is liquidated with a 10% incentive, $45.5 worth of collateral would be paid to the liquidated party, and $4.5 would be given as a reward to liquidators.
Both the Close Factor and Liquidation Incentive are covered in greater detail in Protocol Parameters
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