Risk
What is liquidation risk?
Collateral sold because a rule fired. Not a dip to wait out inside a loan.
- 01Collateral
- 02Debt
- 03Threshold
- 04Forced sale
A rule, not a dip
Liquidation is a protocol selling or seizing collateral because a health rule fired. Inside a loan, waiting for a bounce is not available once the rule has executed. The loss is realised at the liquidation price, plus penalty.
Vaults inherit it
A credit vault that supplies to a lending market takes the market’s bad debt if collateral gaps through the oracle. A leveraged vault can be liquidated on its own hedge. Recursive loops fail faster because the buffer is thinner.
What to inspect
Oracle source, liquidation bonus, whether the market can be liquidated in size, and how correlated the collateral is. ‘Overcollateralised’ is a design, not a guarantee the collateral will be there at the printed price.
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