liquidations

Liquidation is the mechanism that keeps the system solvent.

If a borrower’s position becomes unsafe, anyone can repay part of their debt and receive collateral at a discount.

When liquidations happen

A position becomes liquidatable when its health factor drops below the liquidation condition defined by risk parameters.

This usually happens when:

• collateral price drops

• borrowed asset price rises

• interest accumulates and pushes debt higher

• user withdraws collateral or borrows too close to limits

Liquidation outcome

When a liquidation occurs:

• the liquidator repays a portion of the user’s debt

• the protocol transfers collateral to the liquidator

• the liquidator receives an additional discount (liquidation bonus) as compensation for execution risk

Liquidation limits and close factor

Protocols commonly limit how much of a position can be liquidated in one call. Orchid can enforce a close factor (configured per market) to prevent full wipes in one transaction.

debtToCover = type(uint256).max is typically supported to “liquidate the maximum allowed”.

Avoiding liquidation

Users can reduce risk by:

• repaying some debt

• depositing more collateral

• borrowing less

• keeping a larger buffer above the UI’s minimum health factor