Liquidation

Liquidation is a critical mechanism within Pluz Finance designed to maintain the stability and security of the lending and borrowing ecosystem. This process ensures that under-collateralized loans are promptly addressed to protect the platform and its users.

What Triggers Liquidation?

Liquidation occurs when a borrower's collateral falls below a specified collateralization ratio. This can happen due to:

• Decrease in Collateral Value: Market fluctuations can reduce the value of the collateral.

• Increase in Borrowed Amount: Accumulating interest on borrowed funds can increase the debt.

Liquidation Process

1. Monitoring: The system continuously monitors the collateralization ratios of all loans.

2. Triggering Event: When the ratio falls below the liquidation threshold, the loan is flagged for liquidation.

3. Executing Liquidation: The collateral is partially or fully sold off to repay the borrowed amount. This helps to restore the required collateralization ratio.

Liquidation Thresholds and Penalties

• Minimum Collateralization Ratio: 110%

• Liquidation Penalty: 5% of the loan amount

• Gas Fees: Fees incurred during the liquidation process

Avoiding Liquidation

Borrowers can take several steps to avoid liquidation:

• Monitor Collateral Values: Regularly check the market value of your collateral.

• Maintain Adequate Collateralization: Keep a buffer above the minimum required ratio.

• Repay Loans: Regularly pay down your borrowed amount to reduce the risk of falling below the threshold.

Example Scenario

Assume a user deposits $1,000 worth of WETH as collateral and borrows $700. If the collateral value drops to $770 (110% of $700), the system triggers liquidation to maintain stability. A portion of the collateral is sold, including a 5% penalty, and gas fees are deducted.