# Liquidation Mechanics

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Purpose of Liquidation

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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.

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This mechanism protects both the protocol and the broader USDm ecosystem from systemic risk.

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When a Vault is Liquidated

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Each collateral type has a Liquidation Threshold (LT) defined as a percentage. When:

```
Collateral Value / USDm Debt < Liquidation Threshold
```

…the vault becomes eligible for liquidation.

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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

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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.

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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.

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The process is permissionless—any address can perform liquidations if criteria are met.

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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           |

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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)

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Protection Against Cascade Liquidations

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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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