Liquidations and Auctions
Describe the process of liquidation of a Safe.
When the value of a safe's collateral can no longer safely cover the safe's debt, the safe can be liquidated. A safe can be liquidated if it's
collateralization ratio, falls below the collateral type's
collateral valueis calculated using collateral prices that are delayed a minimum of 1 hour. This gives time for safe owners to react to changing collateral prices.
When a safe is liquidated, its collateral is seized and put up for auction to sell in order to cover the safe's outstanding debt. The system currently pays a tip of
liquidation gas costs + 25 TAIto anyone who liquidates a safe.
As a penalty for being liquidated, the system will attempt to raise slightly more than the safe's outstanding debt through the collateral sale. This extra amount is the
liquidation penaltyand is expressed as a percent of the safe's debt. For example, the liquidation penalty for ETH-A is 1%.
To sell the collateral efficiently, the system offers the collateral for sale at a discount and keeps increasing the discount until the collateral is sold. This is a dutch, or
increasing discount, auction. The system initial offers the collateral for sale at a
minimum discountand keeps increasing it up to the
maximum discount.The system linearly increases this discount over a period of 7 days until the collateral is sold. For example, ETH-A auctions have a minimum discount of 1% and maximum discount of 30%. After 7 days, the collateral will be offered at a 30% discount.