> 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/sell-side-collateral-and-liquidation.md).

# Sell-side Collateral & Liquidation

### Sell-side LP Collateral

Sell-side Liquidity Providers (LPs) are required to post collateral when they commit liquidity to the pool. This collateral acts as a risk buffer and is used to ensure that LPs can fulfill their rebalancing responsibilities.

* **Purpose**: LP collateral ensures the protocol can continue functioning even if LPs fail to rebalance their positions. In such cases, the collateral is used to settle the LP's obligations to users.
* **Required Collateral**: The amount of required collateral is determined by the pool's strategy contract and is initially enforced during `addLiquidity`.
* **Health Check**: Collateral health is continuously monitored via `getLPLiquidityHealth`. LPs must keep their collateral ratio above the minimum healthy threshold.
* **Adding Collateral**: LPs may add additional collateral at any time using `addCollateral`. If the LP was flagged for liquidation and the added collateral brings them back to a healthy state, the liquidation is automatically cancelled.
* **Withdrawing Collateral**: LPs can reduce their collateral using `reduceCollateral`, but only if it doesn't breach the required threshold.

### Sell-side LP Liquidation

If an LP becomes under-collateralized, the protocol allows partial liquidation of their position to protect users and system solvency.

#### When Can LP Liquidation Happen?

* LP's collateral health falls below the critical threshold.
* Liquidation amount is within protocol-specified limits and does not exceed 75% of available liquidity.
* LP must not have any pending requests.
* The protocol must be in an active cycle.

#### Liquidation Process

1. **Trigger**: Any third party may call `liquidateLP` on an under-collateralized LP.
2. **Validation**: The protocol checks collateral health, ongoing requests, and allowable liquidation limits.
3. **Request**:
   * A liquidation request is recorded for the LP.
   * The initiating liquidator's address is stored.
4. **Settlement**:
   * If liquidation proceeds post-cycle, LP's liquidity commitment is reduced.
   * A portion of their collateral is transferred to the liquidator as a reward.
   * If LP is left with no remaining liquidity, they are fully removed.

#### Cancellation

If the LP adds enough collateral before the next rebalancing and their position returns to a healthy state, the liquidation is cancelled and the request is cleared.

> Note: LPs who are liquidated lose part of their committed collateral as a liquidation penalty. Maintaining adequate collateral ensures continued participation in the protocol.