Liquidators
Overview
This document serves as a guide for actors looking to build liquidation bots for Arcadia Finance. Liquidators play a crucial role in maintaining the solvency of the system by participating in auctions when an Arcadia Account falls below its required margin. Arcadia uses a three-step liquidation mechanism, ensuring fairness and efficiency in the liquidation process.
Liquidation Process
Step 1: Initiating Liquidation
The liquidation of an Account is triggered in the Liquidator contract when an account fails to meet its margin requirement. Any user can act as an initiator and trigger liquidation. The initiator receives an initiator fee as an incentive for starting the liquidation process. Once liquidation is initiated, an auction is launched, allowing other users (liquidators) to bid on the account's assets.
Step 2: Bidding on an Ongoing Auction
Once an auction is live, liquidators can submit bids to purchase a portion of the account's assets. Arcadia supports partial liquidations, meaning that a liquidator does not have to buy all the assets at once, but can choose a portion of the assets to acquire. The auction mechanism ensures that assets are sold at fair market prices, protecting both the account owner and the liquidators.
Step 3: Ending the Auction
The auction can only be finalized once the account is restored to a healthy state (i.e., the remaining assets sufficiently cover the outstanding liabilities). A separate end-liquidation reward is distributed to the user who successfully triggers the auction's completion. This mechanism ensures that liquidators remain incentivized to follow through until the auction is resolved.
Technical Implementation of the Liquidation Steps
Step 1: Initiating Liquidation
To start the liquidation process, a liquidation initiator should call the liquidateAccount() function in Liquidator.sol.
The liquidation will only be initiated if the account does not meet the margin requirements. Specifically, the liquidation value must be smaller than the used margin, where:
usedMargin = openDebt + minimumMargin_
To get the liquidation value, you can call getLiquidationValue() on the Account. Additionally, you can easily check if an account is liquidatable by calling isAccountLiquidatable() on the Account. Additionally, to determine the initiator weight and termination weight, you can fetch the liquidation parameters from the creditor. These values are used to compute the initiator and terminator fees based on the open debt.
For more details on reward calculations, refer to the _calculateRewards() function in LendingPool.sol.
Step 2: Bidding on an Ongoing Auction
Once an auction is live, liquidators can participate by calling the bid() function in Liquidator.sol. This function allows liquidators to purchase a portion of the liquidated assets at the current auction price.
How to Place a Bid
A liquidator calls
bid()with the desired amount of assets to purchase.The contract calculates the current auction price based on the exponential decay model.
If the bid is valid, the liquidator receives the purchased assets, and the bid amount is used to cover the account’s outstanding liabilities.
The bidding continues until either the full liquidation amount is covered, the auction reaches the cutoff time, or a user manually ends the auction if the account is brought back to a healthy state.
Key Considerations for Bidding
Partial liquidations are supported, meaning liquidators can bid on only a portion of assets instead of the entire liquidated position.
Once the cutoff time is reached, any remaining assets are transferred to the protocol owner for manual liquidation.
Step 3: Ending the Auction
To finalize the auction, an actor must call the endAuction() function in Liquidator.sol. This function ensures that the account is returned to a healthy state before the auction is officially closed.
Conditions for Ending the Auction
The auction can only be ended if:
The collateral value is greater than or equal to the used margin.
These values can be retrieved from the account contract:
Reward for Ending the Auction
A termination reward is distributed to the actor who successfully ends the auction.
To calculate the termination fee, refer to the same
_calculateRewards()function inLendingPool.solas outlined in Step 1.
By executing endAuction(), the liquidator ensures that the account has recovered, any unsold assets are handled properly, and the liquidation process is successfully completed.
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