🛎️Liquidation mechanics and insurance

Health factor

Health factor is a crucial factor of every debt position. If Health Factor is <1, then position may be liquidated. It calculates automatically at any moment of time based on onchain data and collateral settings

$$HF = \frac{\sum{ \mathrm{ColateralInUSD_{amount} \times Colateral_{LTV}}}}{\mathrm{DebtInUSD}}$$

Liquidation premium

Any user of Cephei Protocol may liquidate any debt position with HF < 1 and earn premium for it. As every debt position os overcollaterized, liquidator earns premium for liquidation.

For example, If user debt is 100$ and his collateral is 125$ at the moment of liquidation (Collateral LTV = 0.8), then liquidator, after repaying users 100$ debt, will receive 125$ in premium (100$ for repaying the debt and 25$ as premium)

Also Cephei offers partial liquidations, where liquidator may liquidate debt not on a full amount of debt and would receive premium proportionally equal to the amount of liquidated debt. Lets look on a previous example. If user debt is 100$ and his collateral is 125$ at the moment of liquidation (Collateral LTV = 0.8), then liquidator may liquidate this position for 50$ and receive 52.5$ (closed debt + 20% from surplus) as premium, so the debt position would be 62.5$ in collateral and 50$ in debt, what will now equal to 1.45 HF

Why use Liquidations

The loan liquidation mechanism that Cephei Protocol implements ensures that if the TVL of the user’s collateral ever falls below the amount of cUSD the user withdraws, then their position will be liquidated.

This ensures that the protocol without fail is over-collateralized and fully backed by its supported assets.