Liquidation

Introduction

Liquidation refers to a critical process initiated when a borrower's health factor falls below the threshold of 1. This scenario typically arises from a misalignment in the value of the collateral against the outstanding loan or debt value. Factors contributing to such misalignment include a depreciation in the collateral's market value or an appreciation in the value of the borrowed debt.

During a liquidation event, up to 50% of the borrower's outstanding debt is automatically settled. The corresponding amount, along with an additional liquidation fee, is deducted from the available collateral. Consequently, the liquidated portion of the debt is considered as effectively repaid post-liquidation. This process ensures the maintenance of a balanced and secure lending environment, safeguarding both the interests of lenders and the stability of the platform

ERC-20 Token Liquidations

When the user's ERC-20 Health Factor drop below 1, assets will be sold via liquidation. The Pac Finance prioritizes liquidating any ERC-20 tokens and ETH.

Liquidators receive bonuses for each collateralized asset

Risk Parameterization

Each asset in the Pac Finance protocol has specific parameters that influences how they can be supplied and borrowed.

• Collateral - Can this asset be used as collateral against which to borrow?

• Loan-to-Value (LTV) - What is the maximum amount that can be borrowed? It is represented as a % with numerator equal to $Max \ Amount \ Borrowed/Value \ of \ Supplied \ Asset$.
• Liquidation Threshold (LT) - This represents the point when the asset would start to go through the liquidation process. It is represented as a % with numerator equal to $Total \ Debt/Value \ of \ Asset$.
• Liquidation Bonus - The amount of additional collateral that liquidators receive / are discounted for purchasing assets on liquidation. Represented as percentage of the collateral purchased.

For each wallet the Liquidation Threshold is calculate as the weighted average of the Liquidation Thresholds of the collateral assets and their value:

$$Liquidation \: Threshold= \frac{ \sum^i_{i=1}{Collateral_i \: in \: ETH \: \times \: Liquidation \: Threshold_i}}{Total \: Collateral \: in \:ETH\:}$$

The table below shows a summary of the latest values:

Asset	Collateral	Liquidation Threshold	Liquidation Bonus
ETH/WETH	Yes	82.5%	5%
USDB	Yes	85%	5%
fwWETH	Yes	82.5%	5%
fwUSDB	Yes	85%	5%