> For the complete documentation index, see [llms.txt](https://own-protocol.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://own-protocol.gitbook.io/docs/buy-side-collateral-and-liquidation.md).

# Buy-side Collateral & Liquidation

### Buy-side Collateral

When minting a token, Users are required to add collateral along with deposit amount. This collateral covers the interest payments. Note that since all pools in the protocol use only yield bearing stablecoins, 90% of the interest is covered from the yield generated. Any additional amount required (usually around 1% annually) is deducted from the collateral

* **Minimum Collateral Ratio**: LPs must maintain a minimum collateral ratio (typically 2%) 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.

***

### Liquidation

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

#### When Can Liquidation Happen?

* The Users collateral health drops below the liquidation threshold (defined by the pool strategy).
* Only 30% of the position can be liquidated at a time.
* A User 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.