Liquidation Dynamics

The solvency of a Credit Account is determined deterministically on-chain. If an account's risk-adjusted value falls below its liabilities, the protocol enforces liquidation to protect liquidity providers.

Solvency Definition: The Health Factor

The core metric for solvency is the Health Factor (HF).

$$HF = \frac{TWV}{Total Debt}$$

Where:

• TWV (Total Weighted Value): The risk-adjusted, quota-limited value of the collateral assets, measured in the underlying token.

• Total Debt: The total amount of underlying token owed, including principal, accrued interest, and quota interest.

Total Weighted Value (TWV)

TWV represents the maximum debt the current collateral portfolio can support. Unlike standard Net Asset Value, Gearbox discounts collateral based on its Liquidation Threshold (LT) and caps it by the Quota allocated to that asset.

$$TWV = \frac{\sum_{i}^{MaxEnabledTokens}{\min{(Quota_i, Balance_i \times Price_i \times LT_i)}}}{Price_{underlying}}$$

• Quota_i: The specific portion of the account's debt limit allocated to token i.

• Balance_i: The balance of token i in the Credit Account.

• Price_i: The current oracle price of token i.

• LT_i: The Liquidation Threshold for token i.

• Price_{underlying}: The current oracle price of the underlying borrowed asset.

Note: The min function ensures that a specific collateral asset cannot secure more debt than its allocated Quota allows, regardless of its market value.

Liquidation Condition

An account is liquidatable if:

1. HF < 1: The TWV is less than the Total Debt.

2. Expiration: The Credit Manager has reached its maturity date (for fixed-term strategies).

Partial Liquidation (Deleverage)

To prevent total loss of user positions during minor market dips, the protocol supports Partial Liquidation. This mechanism sells only enough collateral to restore the Health Factor to a safe level, rather than closing the entire position.

This process is typically executed by a specialized Deleverage Bot.

Execution Logic

When HF drops below a configured minHF (but is typically still > 1), the bot executes a deleveraging transaction:

1. Calculates the amount of collateral required to be sold to raise HF to targetHF.

2. Repays a portion of the debt.

3. Charges a reduced premium compared to full liquidation.

Configuration Parameters

Parameter	Description
minHF	The threshold triggering partial liquidation (e.g., 1.05).
maxHF	The target Health Factor after deleveraging.
PremiumScale	The percentage of the full Liquidation Premium charged (e.g., 50% of standard premium).

Full Liquidation

If Partial Liquidation is insufficient or if HF drops significantly below 1, a Full Liquidation occurs. The liquidator repays the total debt and claims the collateral assets at a discount.

Total Value Calculation

Liquidation math relies on the Total Value of the account (undiscounted NAV), measured in the underlying token.

$$Total Value = \frac{\sum_{i}^{MaxEnabledTokens}{Balance_i \times Price_i}}{Price_{underlying}}$$

Liquidator Incentive

The liquidator receives the collateral assets valued at a discount (the Liquidation Premium).

$$LiquidatorProfit = TotalValue \times LiquidationPremium - GasCost$$

Borrower Loss

The borrower loses the collateral used to pay the debt, the premium, and the protocol fee.

$$AccountLoss = \min(TotalValue \times (LiquidationPremium + LiquidationFee), TotalValue - Total Debt)$$

• Liquidation Premium: Paid to the liquidator.

• Liquidation Fee: Paid to the Protocol (Curator & DAO).

Bad Debt & Socialization

Bad Debt occurs when a Credit Account is liquidated while its Total Value is less than its Total Debt.

Resolution Mechanism

1. Fee Buffer: Unclaimed protocol fees (Curator/DAO share) are burned to cover the deficit.

2. Socialization: If fees are insufficient, the remaining loss is socialized among Liquidity Providers by reducing the exchange rate of the Diesel Token (LP token).

Learn More

• Data sources: How does the protocol obtain asset prices for Total Weighted Value (TWV) calculations?

  • Price Oracle

• Parameter control: Who sets liquidation thresholds (LT), premiums, and fees?

  • Risk Configuration Dictionary

• Quota mechanics: How are quota limits defined and adjusted?

  • Collateral Limits & Specific rates