At Unit Protocol users can deposit any one of a number of accepted forms of collateral and take out a loan against that collateral in $USDP. Every $USDP is fully backed by by the Collateralized Debt Position (CDP) set by the user.
If a users debt/collateral ratio exceeds a Liquidation Ratio (LR) for a CDP, it will be subject to liquidation. This is why it is essential that users set their collateralization ratio appropriately and monitor their positions to ensure they're not at risk for liquidation.
When a liquidation is triggered the collateral deposited will be sold to cover the users debt and liquidation fee will be incurred.
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 is ~0.09% decrease per block.
Every participant can buyout 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 realization, the remaining part is returned to the borrower's address. His USDP debt is burned, and the liquidation fee is sent to the governance pool address for fee distribution.
Liquidation is necessary to ensure that $USDP can maintain its price peg with the US Dollar. Key to achieveing this is ensuring that $USDP is backed by enough collateral value to maintain this peg. Liquidation ensures that vaults that are under collateralized are closed out