Liquidation

Liquidation in Lista Lending is a vital risk management tool that safeguards lenders’ capital by ensuring borrowers maintain sufficient collateralization. Mirroring Morpho’s design, Lista Lending implements two liquidation approaches on BNB Chain:

  • Standard Liquidation: A core protocol feature enabling full or partial liquidation of a borrower’s position when their Loan-To-Value (LTV) exceeds the market’s Liquidation Loan-To-Value (LLTV) threshold.

  • Pre-Liquidation: An optional, opt-in mechanism via an external contract, allowing smaller, incremental liquidations before reaching the standard threshold, providing borrowers with a safety buffer.

Integrated into Lista Lending’s upgradeable vault system, these mechanisms ensure market stability while supporting its vault-centric, permissionless lending model.

Understanding Loan-To-Value (LTV)

The Loan-To-Value (LTV) ratio is a critical metric assessing a position’s risk by comparing debt to collateral value.

How to Calculate LTV

The LTV is calculated as: LTV = (Borrowed Amount × Oracle Price) / (Collateral Amount × Oracle Price Scale)

Where:

  • Borrowed Amount: The total borrowed assets (e.g., lisUSD).

  • Oracle Price: The price from the market’s oracle (e.g., Chainlink).

  • Collateral Amount: The supplied collateral (e.g., pt-clisBNB).

  • Oracle Price Scale: 1e36 (standard scaling factor).

Standard Liquidation

Standard liquidation is Lista Lending’s primary defense against borrower defaults, embedded in the protocol’s core contracts.

When Is a Position Liquidatable?

A position becomes liquidatable when LTV > LLTV

This occurs due to:

  • A drop in collateral value (e.g., pt-clisBNB price falls).

  • An increase in debt from accrued interest.

  • A combination of both.

Example:

  • Collateral: $100 (pt-clisBNB).

  • LLTV: 80%.

  • Safe: Borrowed value ≤ $80 (LTV ≤ 80%).

  • Liquidatable: Borrowed value > $80 (LTV > 80%).

How Standard Liquidation Works

When triggered, any external party (liquidator) can repay part or all of the borrower’s debt, receiving collateral plus a bonus determined by the Liquidation Incentive Factor (LIF).

Liquidation Incentive Factor (LIF)

The LIF sets the bonus: LIF = min(M, (1/β × LLTV + (1 - β)))

Where:

  • β: 0.3 (constant).

  • M: 1.15 (cap).

  • For LLTV = 80%, LIF ≈ 1.06 (6% bonus); initial default set at 1.048 (4.8%) per Lista DAO.

All LIF value goes to the liquidator; Lista Lending takes no fee.

Standard Liquidation Step-by-Step

Initial Position:

  • Borrower deposits $100 pt-clisBNB, borrows $70 lisUSD (LLTV = 80%).

  • Interest accrues, raising debt to $80.0001.

  • LTV = 80.0001% > 80% → Liquidatable.

Liquidation Process:

  • Liquidator repays $80.0001 lisUSD.

  • LIF = 1.048 (4.8% bonus, per section 2.6.3).

  • Seized collateral: $80.0001 × 1.048 = $83.84 pt-clisBNB.

After Liquidation:

  • Borrower: Debt cleared, retains $16.16 pt-clisBNB.

  • Liquidator: Spent $80.0001, received $83.84; profit = $3.84 minus gas fees.

Key Features

  • Liquidation Amount: Up to 100% of debt in one transaction.

  • Trigger: LTV > LLTV.

  • Incentive: Fixed LIF based on LLTV (e.g., 4.8%).

  • Borrower Impact: Potential full liquidation.

  • Implementation: Core contract feature.

​​Pre-Liquidation

Pre-liquidation is an optional, opt-in mechanism offering a buffer before standard liquidation.

What Is Pre-Liquidation?

Pre-liquidation enables partial position closure when LTV exceeds a predefined Pre-Liquidation Loan-To-Value (preLLTV) but remains below LLTV, reducing risk incrementally.

Example:

  • Collateral: $100 pt-clisBNB.

  • LLTV: 80%, preLLTV: 75%.

  • Safe: LTV ≤ 75%.

  • Pre-Liquidatable: 75% < LTV < 80%.

  • Fully Liquidatable: LTV > 80%.

Pre-Liquidation Parameters

  • preLLTV: Threshold for pre-liquidation (e.g., 75%).

  • Pre-Liquidation Close Factors (preLCF₁ & preLCF₂): Max debt repayable, scaling linearly: preLCF = [(LLTV - LTV)/(LLTV - preLLTV)] × preLCF₁ + [(LTV - preLLTV)/(LLTV - preLLTV)] × preLCF₂

  • Pre-Liquidation Incentive Factors (preLIF₁ & preLIF₂): Bonus scaling between preLIF₁ and preLIF₂ based on LTV.

  • Pre-Liquidation Oracle: Assesses pre-liquidation eligibility (may match market oracle).

Pre-Liquidation Step-by-Step

Initial Position:

  • Borrower deposits $100 pt-clisBNB, borrows $75 lisUSD (LLTV = 85%, preLLTV = 79%).

  • Collateral drops, LTV rises to 80%.

  • 79% < LTV (80%) < 85% → Pre-Liquidatable.

Pre-Liquidation Process:

  • Pre-liquidator repays 50% of $80 debt ($40), assuming preLCF = 50%.

  • preLIF = 1.03 (e.g., lower than standard 1.05 for 85% LLTV).

  • Seized collateral: $40 × 1.03 = $41.2.

After Pre-Liquidation:

  • Borrower: $40 debt remains, $58.8 pt-clisBNB left; new LTV = 68%.

  • Pre-liquidator: Profit = $1.2 minus fees.

Key Features

  • Trigger Zone: preLLTV ≤ LTV < LLTV.

  • Closure: Limited by preLCF (e.g., <50%).

  • Incentive: Dynamic preLIF, typically lower than LIF.

  • Borrower Impact: Incremental deleveraging.

  • Implementation: Opt-in via external PreLiquidation contract.

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