How to Manage Liquidation Risk

How to manage liquidation risk

Liquidation is a process that occurs when a borrower's % Away from Critical LTV goes below 0 (Current LTV is above Critical LTV) due to the value of deposited assets not providing enough coverage for all the borrowed assets. This might happen when the deposited assets fall in value relative to borrowed assets.

Anyone can trigger liquidation of a margin account that has breached Critical LTV. If an account is capable of being liquidated, a liquidator can take over an account. It would need to take over the account completely (100% of deposits and borrows) and should have enough funds in its own account, so that that resulting loan-to-value is less than 1/[110]%.

How to monitor risk of your portfolio

Your Loan Health is driven by Health Reserve, which is the % by which the value of assets needs to go down by to reach a liquidation threshold.

Once Loan-to-value of your portfolio (value of Borrows / value of Deposits) breaches Critical Loan-To-Value, your portfolio may be liquidated.

Your Loan Health status is determined by Health Reserve as follows:

Good: above 30% away from Critical LTV

Normal: 10-30% away from Critical LTV

Danger: below 10% away from Critical LTV

If your Loan Health is in the red zone you should deposit more funds to lower the loan-to-value of your portfolio.

Make sure to monitor your Loan Health to prevent liquidation.