Buy-side Collateral & Liquidation

Buy-side Collateral

When opening a synthetic position, LPs are required to add collateral along with deposit amount. This collateral primarily covers interest payments of the lps.

• Minimum Collateral Ratio: LPs must maintain a minimum collateral ratio (typically 12.5%) relative to their deposit amount. This is enforced during deposit via the depositRequest function.

• Cycle-based Interest Deduction: Interest is accrued on the synthetic asset exposure and automatically deducted from user collateral every cycle.

• Adding Collateral: Users can add collateral at any time using the addCollateral function. If the position was under liquidation and sufficient collateral is added, the liquidation can be automatically cancelled.

• Withdrawing Excess Collateral: Users may reduce their collateral using reduceCollateral, but only if they maintain the required collateral threshold. Withdrawing beyond the excess portion is blocked.

Maintaining a healthy collateral ratio is crucial. If the collateral value falls due to price changes or accrued interest, the position becomes vulnerable to liquidation.

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Liquidation

When a LP’s position becomes under-collateralized, it may be liquidated partially by other participants.

When Can Liquidation Happen?

• The LP's collateral health drops below the liquidation threshold (defined by the pool strategy).

• Only 30% of the position can be liquidated at a time.

• An LP cannot liquidate themselves.

• The liquidator must hold enough xTokens (asset tokens) to cover the liquidation amount.

Liquidation Process

1. Trigger: A liquidation is initiated via the liquidationRequest function by a third party.

2. Conflict Resolution: If a better liquidation offer already exists (higher amount), the new request is rejected.

3. Execution:

   • Liquidator transfers xTokens to the pool.

   • A liquidation request is recorded.

4. Cancellation:

   • If the user adds sufficient collateral before the next rebalancing starts, the liquidation request is cancelled.

   • The liquidator’s xTokens are refunded.

5. Claim:

   • If liquidation is not cancelled and the cycle advances, the liquidator can claim reserve + collateral equivalent to the redeemed asset tokens.

   • The liquidated user forfeits the equivalent amount of asset and collateral from their position.

Note: Liquidated LPs cannot reclaim their reserve or collateral. To exit their position, they must rely on selling their synthetic tokens (xTokens) in secondary markets.