What does it mean to “get liquidated”?
Well, if you are reading this, surely that is what you are wondering. Before answering that question, let’s briefly review some concepts.
When we deposit a currency in Venus, we are accessing the right to earn interest (in the deposited currency and, in addition, rewards paid in XVS). Also, Venus gives us the possibility that, in addition to making our money yield, take a loan using our currency as collateral for that loan.
Here, I want to stop and explain this concept well.
How much can we borrow?
There is a “collateral factor” for each token in Venus Protocol. This indicates the maximum amount that we can borrow on our guarantee for that particular token (collateral).
* Clarification: As of today 01/02/21, all have a collateral factor of 60%, but it can be changed in future proposals. *
The MAXIMUM money we can borrow is 60% of the USD value of our guarantee deposited in Venus. We call this maximum value “borrow limit”. The borrow limit is displayed in the “dashboard” section of App.venus.io as a bar that indicates the percentage of our loan limit. This bar goes from 0% to 100% (in terms of the value in USD of our guarantee it is the representation of 0% to 60% of the value of our guarantee). To make it clear, 100% of the borrow limit represents 60% of the value of our guarantee.
With that cleared up, let’s move on. We should never let the borrow limit reach 100% as this puts us in a position to be liquidated.
And, NOW YES, what does it mean to get liquidated?
When we liquidate a position, we are enabling the liquidator to pay our loan and we give him the right to take our deposited guarantee equivalent to the amount paid by him + 10% of that amount that he has left as profit.
How much do they liquidate us?
They liquidate us enough to pay our loan + 10% on that value that remains of profit for the liquidator.
Do they liquidate our entire guarantee?
No, the liquidator can pay up to a maximum of 50% of the value of the loan, paying us the corresponding value in our deposited currency plus its added 10%.
Can I be a liquidator?
Yes, anyone can be a liquidator. You only need to know how to interact with the function corresponding to the vToken smart contract, find a person in a liquidation position, BNB to pay for the gas fee of the network, and money to pay the loan. Bots are often programmed that do this in seconds, so manual settlement, while not impossible, is often difficult (although it can be attempted).
So when I get liquidated, what is my loss? Well, technically the only loss we have is the 10% penalty commission that we pay to the liquidator for liquidating us, since we have already received the remaining value when taking the loan.
Ex: I deposited $ 100, I borrowed $ 60.
The liquidator liquidates me $ 30 (maximum that can liquidate us in this case) + $ 3 fee for the penalty of being liquidated.
When I repay all the remaining loan that was left ($ 30 in this case) I will have $ 97, that is, a loss of $ 3 (10% of the penalty for being liquidated) with respect to my original deposit.
What makes us enter the clearance range?
We can group into two main factors the causes that could put us in the liquidation range.
1) The value of the currency we deposit:
If that value falls, it puts us at risk, since we have less value of USD in guarantee of our loan, raising the percentage of borrow limit and bringing it closer to 100%. On the contrary, if the value of our collateral rises, it drives us away.
2) The value of the borrowed currency:
If the value of our loan rises (for example we borrow BTC) this brings us closer to the settlement point, since we will have more and more value in USD of loan. On the contrary, if it goes down, it would drive us away.
To this we must add the variables of the interest to be paid and the interest generated that brings us closer to and away from the settlement point, respectively.
Finally, I leave you some useful accounts to calculate important information about the settlements.
First some clarifications:
Supply: Value in USD that we deposit
Borrow: Value in USD that we borrow
Settlement point: Value in USD that our collateral has to fall to put us in a liquidation position.
Supply x 0.6 (collateral current factor) = Maximum amount to borrow
(Borrow / 6) x 10 = Settlement point (value in USD)
Settlement point / quantity of coins in supply = Price to which our collateral currency has to fall to put us in a settlement position (It is only possible to calculate this like this, if we have a single supply currency)