Liquidations

Overview

Flux Finance enables autonomous overcollateralized lending. A borrower's collateral should always be worth more than the borrowed balance to ensure the protocol and its lenders suffer no losses.

Liquidations should be rather rare on Flux. The supported markets, especially those eligible as collateral, should typically not be very volatile. However, in certain extreme scenarios, a borrower's equity can become too low and the account might need to be liquidated: some of its collateral is sold off to pay back the debt. Third-party liquidators, typically bots, are incentivized to take on this role by being able to buy the collateral at a small discount compared to the oracle price.

To avoid getting liquidated, you should monitor your account's LTV to ensure it stays at a healthy level.

Technical Details

Liquidations on Flux are very similar to liquidations on Compound V2 (opens in a new tab).

An account becomes subject to liquidation when its liquidity (i.e. the aggregate collateral factor of its assets) becomes negative. At that point, a third-party liquidator will be able to pay off some of the borrower's debt and seize the corresponding collateral at a small discount. The protocol will also collect a small piece of the collateral and add it to its reserves.

However, unlike on Compound, liquidations on Flux respect the underlying asset's permissions (e.g. KYC). For example, to liquidate an account using OUSG (opens in a new tab) as collateral, the liquidator must be KYC'd and whitelisted to hold that token.

To trigger a liquidation, a user must call the liquidateBorrow function on the relevant fToken contract. For technical details, refer to the Compound V2 docs (opens in a new tab).

Bad Debt

The protocol aims to ensure that every account always has positive equity. However, in scenarios of extreme volatility, an account's equity might become negative when the LTV increases too quickly before it can be liquidated. In such cases, the borrower and liquidators are not incentivized to pay back the debt, so the protocol and its lenders accrue bad debt (losses).

Bad debt accrual should be extremely unlikely on Flux since its assets are generally very stable. As an additional safety mechanism, Flux's stablecoins oracles never price them at more than 1 USDC, reducing the risk of external oracle manipulation.

In the unlikely scenario that bad debt accrues, Flux's reserves in that market are first used to cover the losses. If there aren't enough reserves to cover it, some lenders may not be able to withdraw their assets.