Liquidations

Arcadia liquidation mechanism: Dutch auction for unhealthy Margin Accounts, partial liquidations, health factor triggers, auction dynamics, and liquidation bot integration.

Overview

Arcadia's liquidation mechanism is designed to protect both lenders and borrowers by maintaining market stability and minimizing excessive liquidations during volatile market conditions. This mechanism exclusively applies to Arcadia Margin Accounts, as Spot Accounts are not debt-enabled and therefore exempt from liquidation processes.

By combining partial liquidations with a Dutch auction mechanism, Arcadia has developed an innovative approach that:

• Minimizes the risk of bad debt

• Prevents unfair account liquidations

• Incentivize third-party participation in price discovery and protocol maintenance

Key Concepts

1. Collateral Value

Represents the maximum debt an Account can assume based on its assets. Calculated as the sum of individual asset prices multiplied by their respective collateral factors.

$$CV = \sum_{i=1}^{n} (P_i \cdot CF_i)$$

Where:

• $CV$: Collateral Value

• $P_i$: Price of asset $i$

• $CF_i$: Collateral Factor of asset $i$

• $n$: Total number of assets

2. Liquidation Value

Defines the threshold at which an Account becomes eligible for liquidation. Calculated by multiplying each asset's latest price with its specific liquidation factor.

$$LV = \sum_{i=1}^{n} (P_i \cdot LF_i)$$

Where:

• $LV$: Liquidation Value

• $P_i$: Price of asset $i$

• $LF_i$: Liquidation Factor of asset $i$

• $n$: Total number of assets

3. Margin Metrics

• Used Margin: The total value of debt drawn by the account, including accrued interest.

• Minimum Margin: A protocol-imposed threshold ensuring system safety, below which margin positions cannot be created.

4. Partial Liquidation

A nuanced approach where only a portion of an Account's position is liquidated, allowing:

• Partial debt repayment

• Preservation of remaining assets

• Reduced risk of total Account destruction

5. Dutch Auction Mechanism

A dynamic pricing model characterized by:

• Starting Price: (Debt + Liquidation Costs) × Starting Price Multiplier

• Price Decay: Exponential price reduction

• Auction Duration: Maximum 8 hours, but most auctions are cleared in 30 to 60 minutes.

• Minimum Price: Debt × Multiplier

6. Liquidation Costs

• Initiator Fee: Compensation for liquidation trigger

• Terminator Fee: Reward for auction settlement

• Lending Pool Liquidation Penalty: Penalty paid by the liquidated Account

7. Account Health Indicators

• Health Factor: Liquidation Value ÷ Used Margin

  $$HF = \frac{LV}{UM}$$

  Where:

  • $HF$: Health Factor

    • Ratio > 1: Healthy Account

    • Ratio ≤ 1: Unhealthy Account

  • $LV$: Liquidation Value

  • $UM$: Used Margin

Liquidation Process

1. Liquidation Trigger

Conditions for Liquidation:

• Health Factor drops below 1

• Triggered by:

  • Automated monitoring systems

  • Decentralized third-party participants

Starting Price Calculation:

Starting Price = (Outstanding Debt + Liquidation Costs) × Starting Price Multiplier

2. Auction Dynamics

• Price Mechanism: Exponential decay over time

• Partial Liquidation:

  • Liquidators can purchase account portions

  • Incrementally reduces user's debt

  • Lowers remaining position's debt ratio

3. Auction Termination

Auction ends when:

• Account reaches a healthy state, where the collateral value > used margin, and the liquidator chooses to terminate

• Minimum price is reached

• Maximum duration (8 hours) is exceeded

• All assets in the Account are liquidated

4. Post-Liquidation

• Surplus funds returned to Account Owner

• Account remains usable

Key Advantages

• Minimized liquidation risk

• Fair asset preservation

• Decentralized participation

• Dynamic price discovery

Disclaimer: Users should thoroughly understand liquidation mechanisms and associated risks.

Liquidation Bots

The mechanism is open to third-party participants who can develop their own bots to act as initiators or terminators or liquidators, and purchase partial account positions during the liquidation process.

You can find more information if you are interested in building your own liquidation bot here.