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Liquidations

What Triggers a Liquidation​

A liquidation occurs when a borrower's health factor drops below 1. This happens when the value of the borrower's collateral is no longer sufficient to cover their outstanding debt, typically caused by adverse price movements or accruing interest. When this threshold is breached, the position becomes eligible for liquidation by any participant in the network.

Liquidation Incentive​

Liquidators receive a liquidation incentive (also called a liquidation bonus) for repaying a portion of the borrower's debt. This bonus is a percentage of the collateral seized, providing a financial reward that motivates liquidators to act quickly and maintain system solvency. The specific incentive percentage varies by market and is set through governance.

How Liquidators Participate​

Anyone can act as a liquidator on the Rheofi Protocol. The process involves:

  1. Monitoring positions for accounts whose health factor has fallen below 1.
  2. Repaying a portion of the borrower's outstanding debt on their behalf.
  3. Receiving the equivalent value in the borrower's collateral, plus the liquidation bonus.

Many liquidators use automated bots to scan for eligible positions and execute liquidations in real time, ensuring that under-collateralized positions are resolved quickly.

Close Factor​

The close factor determines the maximum percentage of a borrower's debt that can be repaid in a single liquidation event. For example, a close factor of 50% means a liquidator can repay up to half of the outstanding borrow in one transaction. This parameter prevents complete position wipeouts and is configurable through governance.

Protecting Against Liquidation​

To minimize liquidation risk:

  • Maintain a high health factor — borrow conservatively relative to your collateral.
  • Monitor positions regularly — keep an eye on collateral asset prices and interest accrual.
  • Add collateral — deposit additional assets to increase your health factor when it starts declining.
  • Repay debt — reduce your borrow balance to widen the safety margin.
  • Use stable collateral — less volatile assets reduce the chance of sudden health factor drops.