Liquidation
Liquidation can be initiated both by Kord.Fi and a third party. How does it work?
First of all, during the liquidation process, the liquidity baking contract is being unwound and the condition for collateral being below 120% of the total borrowed amount checked. If the collateral is actually above this amount the unwinding gets canceled and the contract is restored. If not, and the collateral value is below 120% of the borrowed amount then we go on with unwinding and its proceeds are sold at market prices. Afterward, the proceeds are repaid back into the lending pool.
If it is Kord.Fi doing liquidation ourselves we merely deposit a part of the (positive) difference between collateral value and borrowed amount into the deposit accounts, while retaining another part to ourselves. Things get more interesting if you are a third party doing the liquidation. In this case, we allow you to pay below the market price for the collateral (but above the borrowed amount). This way you can “buy” the Farm at a discount and unwind it at a profit if you manage to quickly liquidate it at the market prices. Another part of the delta between collateral liquidation price and borrowed amount once again goes to the Lender deposits.
The preferred type of liquidation is the third-party one, and we ensure that potential liquidators have financial interests to do so.
We have so far covered cases when the collateral value is solidly above the total amount borrowed. What happens if somehow (due to market volatility or another negative factor) the collateral no longer covers the amount borrowed and the Farm is effectively underwater? In cases like this Kord.Fi uses emergency liquidation and unwinds contracts for which the collateral is below the borrowed amount in total value. The collateral Settlement proceeds then are used to repay lenders but in this case unlike during the normal liquidation routine:
- Liquidators can not make money on this
- Lenders are assigned a loss on the delta between proceeds and the amount borrowed that is spread across lenders in equal proportion
Thus the incentivized liquidation process also helps create a financial buffer to offset losses from cases when due to outsized volatility we have to liquidate farms at a loss to the lenders. This effectively creates an additional Insurance Mechanism for Lenders.
