Liquidation

Liquidation at Lista Lending is a vital risk management tool that safeguards lenders’ capital by ensuring borrowers maintain sufficient collateralization. This mechanism enables 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, ensuring market stability while supporting its vault-centric, permissionless lending model.

Understanding Loan-To-Value (LTV) Ratio

The Loan-To-Value (LTV) ratio is the ratio between the value of your loan and your collateral. It is a critical metric assessing a position’s risk by comparing debt to collateral value.

How to Calculate LTV

$$LTV = \frac{Loan\ Asset\ Amount}{Collateral\ Asset\ Amount\times \frac{Oracle\ Price}{Oracle\ Price\ Scale}}\times100\%$$

Where:

Oracle Price is represented in the ratio between the prices of collateral asset and loan asset.

Oracle Price Scale is $10^{36}$ and is used for price normalization.

Example:

At Lista's BNB/USDT market, if you deposit 1 BNB and borrow out 500 USDT.

At a certain time, the price of BNB/USDT Lista fetches from the oracles is $8\times10^{38}$. Divide this number by $10^{36}$, we will get the normalized price of BNB: 800 USDT.

Then the LTV of this loan is $\frac{500}{800}\times 100\% = 62.5\%$

Standard Liquidation

Standard liquidation is Lista Lending’s primary defense against borrower defaults, embedded in the protocol’s core contracts. Each market comes with its own liquidation loan-to-value (LLTV) ratio, an arbitraty number used as trigger for liquidation.

When Is a Position Liquidatable?

A position becomes liquidatable when its LTV exceeds the LLTV of its corresponding market.

This may occurs due to:

• A drop in collateral value (e.g., BTCB price falls).

• An increase in debt from accrued interest.

• A combination of both.

How Liquidation Works

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

LIF varies from market to market and is determined by a market's LLTV:

$$LIF=min(M,\ \frac{1}{\beta\times LLTV+(1-\beta)})$$

Where:

• $\beta$ is a constant, 0.3.

• $M$ is the maximum incentive factor, 1.15.

When a market has an LLTV of 80%, LIF ≈ 1.06 (6% bonus). Currently, Lista DAO sets a minimum LIF of 1.048.

To incentivize timely liquidation, all LIF bonus goes to the liquidator; Lista charges no fee.

A Step-by-Step Example

Let's say you deposited 100 USDT and borrowed out 91.5 USD1. This market has an LLTV of 91.5%.

Your LTV is $91.5/100 = 91.5\%$, so the moment interest starts accruing, your LTV will exceed the LLTV. A liquidation will be triggered and a liquidator will step in to repay the debt. (This is also why we do not recommend borrowing close to LLTV)

Now, a liquidator can either repay this loan in part or in full and receive some of the collateral plus bonus determined by the LIF. With an LLTV of 91.5%, the LIF for this market is:

$$LIF=min(M,\ \frac{1}{\beta\times 0.915+(1-\beta)})=1.026$$

This is smaller than the minimum LIF, 1.048 so $LIF=1.048$.

This means a certain amount of collateral will be seized:

$$Seized\ Collateral\ Value = Outstanding\ Loan\ Value\times LIF$$

The outstanding loan is 91.5 USD1 (plus a minuscule amount of interest). If the oracle dictates 1 USD1 = 1 USDT, then the amount of collateral seized will be:

$$91.5\times LIF = 91.5\times 1.048 = 95.892\ USDT$$

If the loan is repaid in full, which means the liquidator pays 91.5 USD1 plus a minuscule amount of interest, they will then receive slightly more than 95.892 USDT. Their profit is: minus gas fees.

Smart Lending Liquidation

Liquidation at Smart Lending works similarly but the value of collateral is calculated slightly differently. Refer to this article for more details.