Liquidation Mechanics
Purpose of Liquidation
Liquidations are a core part of the Mynt (USDm) protocol. They ensure system solvency and peg stability by automatically correcting undercollateralized positions. When the collateral value of a vault falls below its liquidation threshold, a portion or all of the collateral is liquidated to cover the outstanding USDm debt.
This mechanism protects both the protocol and the broader USDm ecosystem from systemic risk.
When a Vault is Liquidated
Each collateral type has a Liquidation Threshold (LT) defined as a percentage. When:
…the vault becomes eligible for liquidation.
Example:
• Vault holds $1000 in MON
• Debt = 700 USDm
• LT = 75%
• Collateral ratio = 1000 / 700 ≈ 143% → safe
If MON drops 10% in price, collateral = $900 → ratio = 900 / 700 = More than 100%
If MON drops 20%, collateral = $800 → ratio = 800 / 700 ≈ 80% → near liquidation
If MON drops 24.5%, collateral = $755 → ratio = 755 / 700 ≈ 75.5% → liquidation triggered
Liquidation Process
1. Trigger: Vault falls below the defined LT.
2. Auction or Instant Execution: Mynt uses instant batch liquidation, allowing any third party (“liquidator”) to repay the USDm debt and receive a discounted portion of the collateral.
3. Reward Mechanism: A liquidation penalty (e.g. 5%) is applied to the collateral, incentivizing liquidators to act and protecting the protocol from bad debt.
Steps for Liquidators
1. Monitor vaults using real-time oracle data.
2. Identify vaults below liquidation threshold.
3. Call the liquidation function with USDm repayment.
4. Receive discounted collateral instantly.
The process is permissionless—any address can perform liquidations if criteria are met.
Liquidation Parameters
Parameter
Description
Liquidation Threshold
% at which vault becomes undercollateralized
Liquidation Penalty
% additional collateral seized to incentivize liquidators
Partial Liquidations
Yes; only enough collateral is liquidated to restore safe health
Oracle Dependence
All liquidation logic depends on real-time price feeds
Liquidation Example
• Alice’s vault has 10 MON = $500
• She minted 400 USDm
• LT = 75% → Required minimum collateral = 400 / 0.75 = $533.33
• Current collateral value = $500 → Vault is undercollateralized
• Bob (liquidator) repays 400 USDm
• He receives MON worth 400 * 1.05 = $420 (5% bonus)
Protection Against Cascade Liquidations
To prevent mass liquidations in a market crash:
• Partial Liquidations: Only part of the debt is cleared at a time, avoiding overcorrection.
• Minimum Liquidation Sizes: To prevent spam or economic griefing.
• Circuit Breakers (future): Possible freeze conditions for extreme volatility.
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