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Liquidation Methodology

Key Terms

  1. 1.
    Max LTV: This is a key parameter that determines how much FLAT can be borrowed based on the collateral market value. The Collateral Value multiplied by the collateral pool Max LTV is the maximum amount of FLAT a user can borrow.
  2. 2.
    Debt Ratio: This metric is calculated using the following formula: (FLAT borrowed + Accrued Interest)/Collateral Value. When a position's debt ratio reaches its Collateral Pool's Max LTV, the position is subject to liquidation.
  3. 3.
    Liquidation Penalty: This is the penalty charged on the position owner once his or her position is liquidated. 5% of the liquidated debt value will be charged as the liquidation penalty. 80% of which (4% out of 5%) will go to our Buyback & Burn program while the remaining 20% (1% out of 5%) will go to the liquidator.
  4. 4.
    Close Factor: This is the maximum amount of the outstanding debt value that can be liquidated in a transaction when a position is subject to liquidation. The close factor is currently set at 50%.

Liquidation Example

Alice staked her BNB-BUSD LP token as collateral to mint FLAT. Now let's assume the following:
  • Alice put up 200 BNB-BUSD LP tokens as collateral (assume 1 BNB-BUSD LP token = $10), totaling her deposited Collateral Value to $2,000
  • The Max LTV for BNB-BUSD LP is 0.75
  • Alice minted 1,200 FLAT ($1,200).
At the moment, below are the statistics for Alice's position:
  • Debt Value: 1,200 FLAT ($1,200)
  • Collateral Value: $2,000 (200 BNB-BUSD LP * $10/Token)
  • Debt Ratio: 0.6 ($1,200/$2,000)
  • BNB-BUSD LP Max LTV: 0.75
A month later, Alice forgot to drink latte and fell asleep early. In the middle of the night, BNB price dropped significantly, causing 1 BNB-BUSD LP token to drop to $8. At that point, the following happens:
  • Alice's deposited Collateral Value dropped from $2,000 to $1,600 (8$ * 200 BNB-BUSD LP tokens)
  • Alice has not paid back any FLAT, so her debt remains at 1,200 FLAT ($1,200)
Below are the statistics for Alice's position as of that night:
  • Debt Value: 1,200 FLAT ($1,200)
  • Collateral Value: $1,600 (200 BNB-BUSD LP * $80/Token)
  • Debt Ratio: 0.75 ($1,200/$1,600)
  • BNB-BUSD LP Max LTV: 0.75
Since Alice's Debt Ratio is now 0.75 ($1,200/$1,600) which is equal to the Max LTV of BNB-BUSD LP collateral pool, her position is now subject to liquidation. The liquidator noticed Alice's position and executed liquidation.
  • Debt Value: 1,200 FLAT ($1,200)
  • Close Factor: 50%
  • Liquidation Value: 600 FLAT (~$600 = 50%*$1,200)
  • Liquidation Penalty: 5%
  • Liquidators Receive: $630 worth of BNB-BUSD LP token
  • Collateral Value: 1,600 FLAT
Since LatteSwap has the Close Factor parameter, there is a limit on the maximum value that can be liquidated. The liquidator brought 600 FLAT to repay 50% (Close Factor) of Alice's debt and is entitled to the additional 5% liquidation incentive.
  • Liquidation Value: 600 FLAT (~$600 = 50%*$1,200)
  • Liquidation Penalty: 5%
  • Liquidators Receive: $630 worth of BNB-BUSD LP token ($600 + ($600*5%)
  • Remaining Collateral Value: $970 ($1,600 - $630)
After liquidation, the liquidator receives $630 worth of Alice's collateral, leaving her remaining collateral value at $970 ($1,600 - $600 - $30), which she can withdraw from the collateral pool.