Liquidations

At Karvana, every kUSD stablecoin is fully backed by a specific collateral token. Unlike most protocols where all user's collateral is at risk of a liquidation event, here at Karvana, each Collateralized Debt Position (CDP) is isolated and only at risk of its own individual liquidation.

To clarify, if a user opens two CDPs with different collateral assets they are able to borrow kUSD versus those collateral assets individually, and set their risk tolerance accordingly. So if they believe a certain collateral asset has a higher chance of decreasing in value, they can choose to borrow less kUSD versus that.

That being said, there are still times when a user's collateral value will decrease and be flagged for liquidation. In this event, 3rd party players (usually bots) can choose to repay all of the kUSD debt in exchange for the collateral used for that specific CDP.

An Example (with made-up numbers)

Alex has some yvWETH. The current price per token of this collateral is $3000.00. Alex decides to borrow the maximum allowance of kUSD, and is quoted a liquidation price of $2500.00

When the price of yvWETH drops to $2500.00, Alex’s collateral is no longer worth enough to cover his debt. Now, anyone can go to work on this CDP and liquidate it. For example, Sarah pays off the kUSD that Alex owes and takes Alex's yvWETH tokens into her possession. However, Alex is not completely at a loss, as he still has the kUSD that he originally borrowed, and he no longer has to pay off his debt.

The Liquidation Fee

Each market has its own liquidation fee, but in general collateral with underlying stable coins will have a liquidation fee of 3% and collateral with more volatile price action will have a liquidation fee of 12.5%

Liquidation Fee Sharing - This fee is the incentive given to the parties performing liquidations. Furthermore, 10% of these collected fees are hard-coded to be set aside for the treasury.

From a user perspective, this fee is already considered in the calculations when quoting a Liquidation price for the respective collateral. When users' liquidation price is reached they are liquidated.

The Liquidation Price

The liquidation price is the price of your collateral at which you will be liquidated. If your collateral value decreases to a point where the liquidation price matches the price of the token that is used as collateral your position will be flagged for liquidation. The contract will not allow liquidators to perform liquidation above the liquidation price, meaning that the user's collateral is safe up until the stated total liquidation price.

Special Features

There are a few important points of note regarding liquidations that should be highlighted very clearly. These points set Karvana apart and can determine whether users will be liquidated.

THEY ARE:

• Karvana uses interest-bearing collateral assets that go up in value on their own regardless of price action.

• kUSD has interest so if a collateral, for some reason or another, does not increase in value, liquidations can still happen. To reduce this risk, the team has selected interest-bearing collateral assets that have a track record of increasing in value at a rate that far exceeds the interest rate on kUSD debt.

• The price action of some collateral assets can be quite volatile. To mitigate risk, the team has set tokens that have price action to have a Maximum Collateral Ratio (MCR) of 75%. Stable coin based collateral generally have a MCR of 90%. Although it may be unlikely that stable coin based collateral will decrease in USD value, it’s not an impossibility as the underlying tokens may lose their price pegs from unforeseeable events.

• Although any person can perform a liquidation, it has become standard that these functions are performed by bots. Because of this, there is no need for a UI on the main site for this function.