Liquidations
Everything about liquidations, and how the Insurance Pool mechanism works
Last updated
Everything about liquidations, and how the Insurance Pool mechanism works
Last updated
A liquidation event occurs when a borrower's drops to 1, indicating eligibility for liquidation. This process allows liquidators to seize control of the borrower's collateral, sell it, and utilize the proceeds to repay the outstanding debt while earning a liquidation fee.
Liquidations are crucial to Tren Finance as they maintain the protocol's solvency and ensure the stability of its collateral-backed synthetic dollar, XY. When a borrower's position becomes under-collateralized due to market fluctuations or asset depreciation, liquidations act as a safeguard by reclaiming and selling the collateral to cover the outstanding debt. This process prevents systemic risks and protects lenders by ensuring that all XY in circulation remains fully backed by sufficient collateral. Moreover, liquidations incentivize borrowers to maintain healthy , thereby promoting responsible borrowing and lending practices within the platform. Ultimately, liquidations uphold the integrity and reliability of Tren Finance, fostering trust and stability in the decentralized finance ecosystem.
Tren Finance currently employs a full-collateral liquidation approach. When a position is flagged for liquidation, the borrower's entire collateral is seized to settle their borrowing position. After the liquidation event, the liquidated borrower retains only the amount of XY they initially borrowed.
The Insurance Pool is used to absorb the liquidation, utilizing a liquidity backstop of XY provided by insurance providers. This mechanism allows insurance providers to use their XY to acquire discounted collateral.
Regularly monitor the health factor of your TrenBox to ensure it remains well above 1.00. Maintaining a higher health factor provides a buffer against market volatility and price fluctuations of the collateral asset.
If the value of your collateral decreases or you have borrowed close to the maximum allowed amount, consider adding more collateral to your TrenBox. This will increase your collateralization ratio and reduce the likelihood of liquidation.
Additionally, repaying a portion of the borrowed XY can improve your health factor. This is particularly useful if the value of your collateral has decreased and you are near the liquidation threshold.
