How liquidations are triggered
A loan can be called for liquidation once the collateral rate reaches 110% or less. This means that when the value of the user's DDEX margin account becomes less than 110% of the value of loan, the position is eligible for liquidation.
Liquidations on DDEX are triggered by a 3rd party initiator. The initiator calls the loan in question. If the loan is less than 110%, the liquidation process begins.
How liquidations are executed
The goal of liquidations are to repay loans so that the lending pool is repaid fully. Liquidations on DDEX are handled through a dutch auction mechanism.
The dutch auction attempts to sell the borrower’s margin balance as needed to repay their debt. However, it doesn’t just start with selling the entire collateral — initially, only a small percentage of the collateral is offered up for auction. As time passes, each subsequent block offers a bit more of the collateral.
Eventually the value of the percentage of collateral offered will make a profitable trade for outsiders. If the auction is completed before 100% of the collateral is used, the remaining collateral will be returned to the borrower, with a small amount going to the initiator as a reward.
Initial collateral rate
The initial collateral rate of a position depends on the leverage rate used to open the position. DDEX currently allows a maximum of 5x Leverage for opening new positions. The following table summarizes the respective initial collateral rates for different leverage rates:
As shown above, the minimum initial collateral rate a user can open a position with is 125%.
How to participate in liquidation auctions
Want to get involved with the liquidation auctions on DDEX? Checkout our Participating in auctions section of our github - we have a template for a liquidator bot you can run that can liquidate undercollateralized accounts. We'll continue to iterate and improve on this in the coming months.