Liquidations

Though liquidations happen on the underlying lending protocols, Asgard has built in measures to watch the underlying protocols like a hawk to prevent bad debt situations.

Understanding Liquidations

Liquidation is the process of forcibly closing a user's position when it no longer meets the minimum collateralization requirements. This process is automated and occurs without the need for user intervention, protecting both the individual user and the lending protocol (where the position sits).

Key Concepts

1. Collateralization Ratio:

   1. The ratio of the value of collateral to the value of borrowed assets.

   2. Asgard requires positions to maintain a minimum collateral ratio to remain solvent.

2. Liquidation Threshold:

   1. The specific collateralization ratio at which a position becomes eligible for liquidation.

   2. This threshold is set to ensure that positions are closed before they become undercollateralized.

3. Liquidation Penalty:

   1. A fee imposed on the liquidated position, designed to incentivize liquidators and discourage risky behavior from users.

   2. Each lending protocol integrated into Asgard may enforce different liquidation penalties.

   3. A liquidation penalty is a fee imposed on the price of collateral assets when liquidators purchase them during the liquidation process.

   4. This penalty is essential as it compensates the liquidators for taking on the risk of acquiring and liquidating the collateral under distressed conditions.

   5. It also serves as a deterrent, encouraging borrowers to manage their positions proactively and avoid falling into liquidation territory.

4. Liquidators:

   1. External parties or automated systems responsible for executing the liquidation process when a position becomes eligible.

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Triggers for Liquidations

Liquidations in Asgard can be triggered primarily by fluctuations in asset prices or changes in lending spread. Understanding these triggers is crucial for users to effectively manage their risk and avoid unexpected liquidations.

Key Triggers for Liquidations:

1. Price Movements:

   1. A primary trigger for liquidation is adverse price movements that diminish the value of your collateral.

   2. When the market moves against your position, the assets backing your position can lose value, causing your LTV ratio to fall below the required threshold.

   3. This indicates that your collateral is no longer sufficient to cover the borrowed funds, placing your position "underwater." Once this threshold is breached, the protocol automatically initiates the liquidation process to prevent further losses and stabilize the platform.

1. Lending Spread Changes:

   1. As Asgard leverages lending markets to provide users with leveraged positions, fluctuations in lending spreads can greatly affect the cost of borrowing.

   2. Impact of Spread Increases:

      1. If the spread between borrowing and lending rates increases, maintaining a leveraged position becomes more expensive.

      2. Since lending spread is charged per block basis, the rising cost can gradually erode the profitability of the position, potentially leading to liquidation if not carefully managed.

      3. Example Scenario:

         1. Consider a user who has opened a leveraged long position on SOL using USDC as collateral. If the lending spread for USDC borrowing widens significantly, the cost of maintaining the position rises.

         2. Over time, this increased cost can reduce the effective collateralization ratio of the position, pushing it closer to the liquidation threshold. If the user fails to adjust their position or add more collateral, they may face liquidation.

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The Liquidation Process

To provide a robust and efficient liquidation process, Asgard does 3 things:

1. Provides you margin calls through notifications on TG/alert emails/SMS

2. If position enters liquidation, Asgard leverages the existing liquidator ecosystem (70+) that operates in the lending protocol ecosystem.

3. Further, to increase robustness, efficiency and reliability of this process, Asgard is also running its own in-house designed Multi-Market HPC Liquidator Bot.

   1. This bot works in tandem with the existing liquidators, ensuring that liquidations are carried out smoothly and without disruption, further maintaining the stability of the platform.