🥃Liquidation

Liquidation Process

Should the Loan-to-Value (LTV) ratio of a Collateralized Debt Position (CDP) surpass the set liquidation threshold, the CDP becomes eligible for liquidation. In this event, the collateral assets within the CDP are auctioned off in a Dutch auction to settle the outstanding $ocUSD debt.

Any excess collateral, post-auction and debt settlement, is returned to the user. It's important to note that liquidations incur a penalty, implying that users must pay back an amount exceeding their actual $ocUSD debt.

The penalties are structured as follows:

- Volatile Assets ($ETH, $wstETH, etc.): 10% - Stablecoins ($USDC, etc.): 5%

Purpose of the Liquidation Penalty

The liquidation penalty is designed to encourage CDP holders to diligently manage their debt positions. Negligence could lead to systemic risks and potential cascading liquidations. Additionally, the penalty serves as a buffer for 'unbacked $ocUSD' that may emerge in extreme market conditions, such as massive devaluations or insolvencies following consecutive liquidations. The system employs the collected penalties, which are usually earmarked as $ocUSD reserves, to cover any shortfalls, thereby maintaining the monetary health of the ecosystem.

Managing Collateral Assets To mitigate liquidation risks and optimize capital efficiency, users have the option to add more collateral to their CDP or withdraw a portion of it, as long as they maintain an collateral ratio below the prescribed limit.