Unit Protocol
Search…
How to avoid liquidations

Liquidation

With Unit Protocol, users can use a huge selection of tokens to take out a loan in $USDP. Every $USDP is fully backed by by the Collateralized Debt Position (CDP) set up by the user.
If a user's debt/collateral ratio exceeds the Liquidation Ratio (LR) for a CDP, it will be subject to liquidation. This is why it's essential that users set their collateralisation ratio carefully and keep an eye on their positions to ensure they're not at risk of being liquidated.

What happens to my tokens if my CDP gets liquidated?

When a liquidation is triggered, the collateral deposited is sold to cover the user's debt, and the liquidation fee will be triggered.

What's the process after a CDP gets liquidated?

Anyone can trigger liquidation by sending a trigger transaction. There are liquidation bots that consistently monitor CDPs and trigger liquidations if the stated condition is met.
After a CDP is triggered for liquidation, a Dutch auction starts for underlying collateral with a linear decrease in price. The price decremental step can be different for various assets, but for the most amount of assets it's ~0.09% decrease per block.
Every participant can buy out the part of the collateral for the current price by paying the $USDP debt for a liquidated CDP. $USDP debt is equal to borrowed $USDP amount plus the liquidation fee in % from this amount.
After collateral realisation, the remaining part is returned to the borrower's address. Their USDP debt is burned, and the liquidation fee is sent to the governance pool address to be distributed.

Why do we need liquidations anyway?

Liquidation is necessary to ensure that $USDP can maintain its price peg with the US Dollar. Key to achieving this is ensuring that $USDP is backed by enough collateral value to maintain this peg. Liquidation ensures that vaults that are under collateralised are closed out
Last modified 17d ago