Liquidation
Last updated
Last updated
In iLoop, a liquidation happens when a keeper initiates a transfer of collateral from a vault that no longer meets collateral requirements. This transfer provides WSOL to the protocol, which is then used to settle the vault’s outstanding debt.
A key distinction with iLoop liquidations is that they are not triggered by the market price of the collateral asset. Instead, they rely on the exchange rate given by the Liquid Staking Token (LST) provider. As a result, the primary triggers for iLoop liquidations are slashing events (when a portion of staked assets is penalized due to validator issues), rather than typical price drops.
This is an important difference because most liquidators work based on market prices, seeking quick profits from the spread between collateral and debt. Therefore, even if a position is liquidatable on iLoop (due to a large enough slashing event), it might not be profitable for liquidators to act if the market price has declined further. This situation is anticipated and accepted within iLoop’s framework.
iLoop’s liquidation module provides an option for market-based liquidations if conditions allow, but the protocol’s core strategy for maintaining solvency relies on manual intervention. If necessary, iLoop can seize control of unhealthy vaults directly, redeem the collateral on the beacon chain, and repay any unbacked debt itself. This approach works for Ion because its liquidations are not as time-sensitive as price-based ones, allowing it to maintain protocol health through deliberate, controlled actions.
Unlike many lending protocols that use a fixed discount rate for liquidators to cover debt in the marketplace, iLoop employs a variable discount rate and partial liquidation approach. This method adjusts the liquidation reward based on the deteriorating health of a position, establishing a flexible cap on how much collateral a liquidator can purchase. This cap is designed so that liquidators only repay the amount needed to restore a position’s safety, preventing unnecessary borrower losses. As debt is reduced, the position's health factor improves, providing a more balanced liquidation process.
