Thread by @w3g_io

1/15

If you put crypto into a Maker Vault you can issue Dai. But, your crypto must have a greater value than the issued Dai. That relation of values has a required minimum level, and when your crypto falls below it, it's a FATALITY (Liquidation) time

How it works? Thread time👇

2/15

💱 Liquidation is the process of selling collateral to cover the amount of Dai a user has issued from their Vault.

It ensures that Dai is always backed by an appropriate amount of collateral by closing-out Vaults that are under their min. required Collateralization Ratio.

3/15

👼 Let's assume you issued 10,000 Dai through a Vault in which you put 6 ETH and the current value of your 6 ETH is 18k USD (1 ETH = 3k USD). Ok! Your Vault is healthy, because your Collateralization Ratio is above 150%. Actually, this Ratio is 180% with the current values.

4/15

🐉 A wild FUD has appeared! Your ETH starts to fall and the Coll. Ratio just broke below 150%

Calm down, you have time to save your vault because the oracle reporting ETH price to the Protocol is updated 1 time per hour. You can watch this data at daistats.com.

5/15

😴💤 But, you were sleeping soundly while this was happening. When the oracle reports the ETH price to the Protocol and your Col. Ratio is setted below 150%, your Vault enters in the Liquidation process.

6/15

⚠️ In short, Liquidation is a process in which the protocol takes the collateral from the Vault and sells enough to cover the debt along with a Liquidation Penalty, leaving the remaining collateral available for withdrawal by the user.

7/15

🤝 When is the debt covered? Liquidations are canceled in Dai which are then removed from the system. So, for the liquidation to be successful, enough Dai is required to stabilize the deficit that the fall of collateral may cause.

8/15

🔨This sale actually is an auction that anyone can participate in. The bidders of these auctions are known as Auction Keepers. They are external actors that are incentivized by profit opportunities to automate certain operations around the Eth blockchain. This includes:

9/15

💰 Seeking out opportunities and starting new auctions
🤑 Detect auctions started by other participants
💸 Bid on auctions by converting token prices into bids

10/15

🇳🇱 The process is based on Dutch auctions which settle instantly. When an auction has started, the price begins high and drops over time. When it reaches a price you want, you can buy the collateral immediately.

11/15

🇬🇧 Dutch auctions were introduced in the Liquidations 2.0 update. Previously, these auctions were based on the English auction system, in which Dai bids are placed, with a participant's capital remaining locked until they are outbid or until the auction terminates.

12/15

☠️ In addition to the collateral, A Liquidation Penalty is a fee paid by Vault owners when the value of their collateral reaches the Liquidation.

13/15

👹 The penalty is added to the Vault’s total outstanding generated Dai when liquidation occurs, which results in more collateral being sold to reach the outstanding debt plus the penalty.

14/15

🌌 Proceeds from Liquidation Penalties are put towards the Surplus Auctions, which result in burned MKR.

And that's we get this FATALITY.

If you want to learn more about Liquidation and their actuions processes, here are few links:

➡️ Thread liq 2.0 upgrade:

➡️ Liq 2.0 voting going live: blog.makerdao.com/the-liquidatio…

➡️ Liq 2.0 module: docs.makerdao.com/smart-contract…

Liquidations are collected* Sorry for the typo 😅