Liquidation
What is Liquidation?
Liquidation is a process by which Farmer's Farming Position is automatically closed when the debt he borrowed is at risk. When Liquidation occurs, KLEVA Protocol closes Farmer's Farming Position and returns the debt he borrowed to the Lending Pool. Farmer is then returned his equity value. Liquidation is a necessary process to protect Lenders' assets, helping Lenders retrieve the asset they have lent.
Please note that Liquidation does NOT mean that Farmer will lose all his assets. Rather, it is a process by which Farmer can automatically return the debt he borrowed from Lenders.
For more details, please refer to Liquidation : A Quick Example
Tactics to control Liquidation Threshold
Adding Collateral
When Farmer's position is at risk of liquidation, but the Farmer wishes to keep his Farming Position, he may add more collateral to reduce the Debt Ratio.
Adding Leverage
When the Equity Value has risen compared to the Debt Value, and the Debt Ratio has dropped accordingly, Farmer may borrow more assets and add Leverage to his position. This way, Farmer can expect higher profit from Leveraged Yield Farming.
Please note that by borrowing more assets (increasing Leverage), Farmers earn more yields but also have to pay more interest (But still, the profit would be much higher).
Closing Farming Position
Farmer may close his position through two methods :
Minimize Trading : KLEVA will automatically convert the minimum required amount of tokens into borrowed token to pay the Borrowing Interest and return the borrowed assets. The remaining will then be returned to the Farmer. In this case, Farmer may receive both tokens of the Farming Pool.
Conversion to the borrowed Token : Farmer's entire position is converted to the borrowed token. Borrowing Interest and borrowed assets are returned to the Lending Pool. Last but not least, the remainder is returned to the Farmer.
In both methods, Farmer will pay the Borrowing Interest and return the assets he borrowed, then receive the remaining assets. Should Leveraged Yield Farming be profitable, Farmer will receive more assets compared to his principal amount.
Liquidation : A Quick Example
Jacob the Farmer holds 100 USD worth of Token A, and borrows 100 USD worth of Token B, with 2.0x Leverage. For Token A - Token B Farming Pool, the Liquidation Threshold is 80%.
Equity Value (Token A) : 100 USD
Debt Value (Token B) : 100 USD
Position Value (Token A + Token B) : 200 USD
Debt Ratio : 50%
After a certain period, the value of Token A depreciates to 50 USD and Token B appreciates to 150 USD.
Equity Value (Token A) : 50 USD
Debt Value (Token B) : 150 USD
Position Value (Token A + Token B): 200 USD
Debt Ratio : 75%
* The ratio is yet to reach 80%, so the position is still safe(not liquidated). However, the ratio is only 5% away from liquidation. When such is the case, Jacob may either
Add Collateral(Equity Value) to reduce his Debt Ratio
Close his Farming Position
Jacob is a risk-taker and keeps his position. After a week, the value of Token B rises to 200 USD.
Equity Value (Token A) : 50 USD
Debt Value (Token B) : 200 USD
Position Value (Token A + Token B): 250 USD
Debt Ratio : 80%
* The ratio has reached 80%, the Liquidation Threshold. At this stage, KLEVA automatically liquidates Jacob's Farming Position. Jacob's debt, Token B (worth 200 USD) is returned to Lending Pool, while Jacob's original asset, Token A (worth 50 USD) is returned to Jacob, after deducing Liquidation Fee.
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