Liquidations

Risk management is a core component of any lending protocol. Orchid Credit continuously monitors user positions to protect both borrowers and liquidity providers, while maintaining overall protocol solvency.

Health Factor

The Health Factor is the primary indicator used to assess the safety of a position.

It represents the relationship between a user’s collateral value and the risk associated with their debt. A higher Health Factor indicates a safer position.

General principle:

• A Health Factor above 1 means the position is sufficiently collateralized

• A Health Factor equal to 1 represents the critical threshold

• A Health Factor below 1 indicates the position is eligible for liquidation

The Health Factor updates in real time based on:

• Collateral value

• Borrowed amount

• Accrued interest

• Asset price movements

• Protocol-defined risk parameters

Generic Health Factor formula

Health Factor = (Collateral Value × Liquidation Factor) / Debt Value

Where:

• Collateral value is derived from oracle prices

• Liquidation factor reflects the accepted risk level of each asset

• Debt value includes principal plus accumulated interest

Each collateral asset has its own liquidation thresholds based on liquidity, volatility, and overall risk profile.

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Liquidation

Liquidations on Orchid are permissionless.

When a position crosses the liquidation threshold, the protocol activates a mechanism designed to restore solvency and protect global liquidity.

Liquidation trigger:

A position becomes liquidatable when:

• The Health Factor falls below the defined threshold

• Collateral value no longer sufficiently covers outstanding debt

At this point, the position is considered undercollateralized.

Goals of the Liquidation:

• Protect liquidity providers

• Maintain protocol solvency

• Rebalance risky positions in an orderly manner

• Reduce the risk of cascading liquidations during volatile markets

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Avoiding Liquidation

Orchid Credit is designed to allow users to actively manage risk before reaching critical levels.

Users can add additional collateral at any time. This increases total collateral value and immediately improves the Health Factor. This approach is especially effective during periods of high volatility or temporary price drops.

Users may also partially repay their borrowed amount. Reducing total debt mechanically increases the Health Factor and lowers liquidation risk. Partial repayments allow fine-grained position adjustments without closing the position entirely.

Thanks to real-time execution on MegaEth, users benefit from:

• Instant Health Factor updates

• Clear visibility of liquidation thresholds

• Immediate feedback on every action (supply, borrow, repay)

This design enables proactive risk management rather than reactive intervention.