# Liquidations

### **Liquidation Process**

Liquidation is a critical safety mechanism within Yei Finance, triggered when the market value of collateral drops below a certain threshold. This process helps maintain the stability and security of the liquidity pool by ensuring that loans are repaid even in adverse market conditions.

#### **Liquidation Threshold**

The liquidation threshold is a key indicator that determines when a loan becomes undercollateralized. For example, if the liquidation threshold is set at 95%, any position whose value exceeds 95% of its collateral's worth is at risk of being liquidated.

#### **Understanding the Health Factor**

The Health Factor (HF) is a crucial metric used to assess the risk of liquidation:

$$
HealthFactor = \frac{CollateralValue \times LiquidationThreshold}{BorrowedValue}
$$

A Health Factor below 1 indicates a heightened risk of liquidation, prompting the protocol to potentially liquidate the collateral to cover the outstanding debt.

#### **Liquidation Scenarios**

**Scenario 1:**

Bob deposits 1000 SEI and borrows 600 SEI worth of USDC. If his Health Factor drops below 1, his position becomes eligible for liquidation. A liquidator can repay 50% of the borrowed amount (300 SEI worth of USDC) and claim a 5% bonus, resulting in the acquisition of 315 SEI.

**Scenario 2:**

In another scenario, Bob deposits 500 SEI and an equivalent value of iSEI, then borrows 500 SEI worth of USDC. If his position becomes eligible for liquidation, a liquidator repays 250 SEI worth of USDC and opts to claim iSEI due to its higher liquidation bonus of 15%, receiving a total of 287.5 SEI worth of iSEI.

#### **Role of Liquidation Bots**

Liquidation within Yei Finance is permissionless, allowing anyone to participate as a liquidator if the process is deemed profitable. This openness ensures that the protocol remains robust and reactive to market dynamics. Initially, the Yei team will deploy dedicated liquidation bots to facilitate efficient protocol operations.

#### **Liquidation Penalty**

The liquidation penalty, which varies by collateral type, encourages liquidators to help maintain the protocol's financial stability.

| Assets | Liquidation Penalty |
| ------ | ------------------- |
| SEI    | 8.5%                |
| USDT   | 6.5%                |
| iSEI   | 6.5%                |
| WETH   | 8.5%                |
| WBTC   | 8.5%                |


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