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Liquidations happen if collateral ratio sinks below the liquidation threshold or if borrower is not paying back his loan.
Liquidations happen in two scenarios:
- If the loan value of the collateral assets sinks below a predefined threshold
- If the borrower has not paid back the loan at the loan term
SmartCredit.io does not earn on liquidations. Borrowers who get liquidated are in a challenging situation anyhow. It is unfair to earn revenues from someone who gets liquidated.
However, traditional DeFi lending platforms—the money market funds and MakerDAO—earn from liquidations. They offer the liquidators a discount of 5% or 10%. The liquidators benefit from this discount and keep all additional profit (market price - liquidation price).
Liquidations have become a significant revenue stream for several protocols. We appreciate the MakerDAO protocol, which publishes liquidation revenues as a component of the composite protocol revenues. However, other protocols are earning from liquidations but not transparently publishing the liquidation revenues.
Numerous protocols state that anyone can run liquidation bots. Yes, that’s true. However, in reality, the protocol teams run their own liquidation bots and are earning additional revenues to the protocols at the cost of liquidated borrowers.
The SmartCredit.io platform runs the SmartCredit.io liquidation bots. These bots are not open for external third parties to run—these external parties would not have any monetary motivation because they would not earn on the liquidations. That's why the platform itself hosts these liquidation bots.
Additionally, there is a Loss Provision Fund (see below). LPF is activated in the low probability event that the liquidation proceeds do not cover the loan principal and loan interest payments. The platform allocates, from every interest payment, a small part into the LPF. In the end - the platform is the guarantor of the LPF.
As the loan term elapses, then the liquidation probability reduces with every day. The loan requests are created with the calculation of the 5% liquidation probability of the collateral. However, if liquidation probability starts to increase, then the borrower is receiving notifications (these can be configured via the profile screen). The borrower can then increase collateral or pay back parts of the loan.