Liquidations
Overview
Each Orchid account is monitored using a single metric called the Health Factor. The health factor represents how well a position is collateralized relative to its borrowed value.
When a position becomes undercollateralized, it becomes eligible for liquidation.
The health factor increases with more collateral and decreases as borrowed value or interest accrues.
Health Factor
The health factor compares the value of supplied collateral to outstanding debt, adjusted by asset-specific risk parameters.
A higher health factor indicates a safer position. A lower health factor indicates increasing liquidation risk.
When the health factor approaches critical levels, Orchid restricts actions that would further increase risk.
When Liquidation Occurs
Liquidation occurs when a position’s health factor falls below the required threshold.
This can happen if:
Collateral value declines
Borrowed asset value increases
Interest accrues over time
Once eligible, a portion of the position can be liquidated to restore solvency.
How Liquidation Works
During liquidation:
A liquidator repays part of the borrower’s debt
An equivalent value of collateral is seized
A liquidation incentive is applied to compensate the liquidator
The liquidated portion reduces the borrower’s debt and improves the remaining position’s health.
Liquidation does not necessarily close the entire position.
Liquidation Incentives
Each collateral asset has a predefined liquidation incentive.
This incentive represents the discount at which collateral can be acquired during liquidation. The exact value depends on the asset’s risk profile and is visible in the protocol parameters.
Higher risk assets generally carry higher incentives.
Avoiding Liquidation
Users can reduce liquidation risk by:
Repaying part of the borrowed amount
Supplying additional collateral
Monitoring health factor during volatility
Repaying debt generally improves health factor more efficiently than adding collateral.
Maintaining a higher buffer provides additional safety during rapid price movements.
Liquidators
Liquidations on Orchid are permissionless.
Anyone can act as a liquidator by identifying an eligible position and repaying part of its debt in exchange for discounted collateral.
There is no whitelisting and no special access.
Liquidation Execution
Liquidators may use different execution approaches depending on liquidity availability and capital setup.
Common approaches include:
Using onchain liquidity to repay debt and acquire collateral
Repaying debt with owned capital and selling collateral externally
Combining repayment and asset conversion strategies based on market depth
Execution method choice affects latency, price impact and profitability.
Liquidators are responsible for managing execution risk.
Important Considerations
Liquidations are triggered by market conditions, not protocol discretion
Price volatility can cause rapid eligibility changes
Execution delays may affect outcomes
Liquidation incentives do not guarantee profit
Liquidators should assess risk carefully before executing.
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