Welcome back to Lending, Simplified!
In our last episode, we explored APY and what you can expect when using Pike.
This week, we'll dive into the topic of Liquidations to understand what they are, how they're executed on Pike, and what that means for you as a borrower.
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2/ Starting off with the basics: what is a liquidation?
A liquidation involves people called "liquidators" who pay back a portion of your debt to purchase the funds from the loan you have taken.
3/ This means that if you supplied 20 ETH, and took out a loan for 10 ETH, the liquidator would be allowed to repay up to 5 ETH of your loan if your health factor drops too much.
4/ So why do we need liquidators?
Simply put, if all of the loans on Pike reached a liquidation threshold, the protocol would become insolvent because there is not enough collateral to pay back the outstanding debt.
5/ Since many of Pike's markets are made of volatile tokens, the value of the collateral will constantly be changing. This is why it's important to monitor your positions, and to over-collateralize accordingly.
6/ Lending protocols like Pike also utilize LTV ratios to ensure loans are properly collateralized. Safe thresholds are reviewed by governance to prevent loans from being liquidated too quickly.
You can learn more about LTV from one of our previous episodes:
Lending Simplified - What is LTV?7/ Since the goal of liquidators is to make a profit when balancing the protocol, a user may not face liquidations unless it is profitable for the liquidator to do so.
This might allow your health factor to drop significantly, but it's highly risky to keep it there.
8/ In addition to liquidators being allowed to purchase up to 50% of your loans value, they're also eligible to claim a bonus for performing the liquidation.
If the liquidation premium is 5%, and they pay enough to cover 5 ETH of someones loan, they would earn 5.25ETH in return!
9/ If you'd like to learn more about liquidations on Pike, we encourage you to check out our docs:
This section is still being worked on, and more information including how to perform your own liquidations will be coming soon!