Thread by @Platypusdefi

#USP101 🔔 How does $USP #liquidation work?

Positions with a health rate lower than 1 are open to discounted collateral liquidation to prevent under-collateralization & protocol insolvency.

We use the dutch auction format, and portions can be filled partially. 🧵

2/ Anyone can trigger a smart contract check of all position health rates. If health rates are below 1, the auction process will be kickstarted. The kickstarter will receive a reward to compensate for their incurred gas fees and efforts.

3/ The contract asks the oracle for the collateral's price and it then calculates the collateral value.

Calculate the auction Starting price by multiplying the collateral value by (1+Buffer). If the buffer is 0, the auction Starting price would equal the collateral value.

4/ Anyone can purchase liquidated collaterals with the given auction starting price in USP.

Max purchasable amount = USP debt owed.

The liquidator can buy a portion of the collateral, where its purchase value is equal to the starting price multiplied by the portion bought.

5/ When the collaterals are not purchased yet, the auction price drops at a set rate described by the function below. The Current price = Starting price×Auction price factor.

6/ When the collaterals are purchased partially, the liquidator pays the Current price × (1 + Penalty) to receive the respective amount of collateral LP tokens. The system retains the penalty and distributes to vePTP holders when fee sharing is active.

7/
▶️As the debt amount decreases & health rates go above 1, the auction will be terminated, the user will be left with some positions

▶️If the health rate is below 1, the auction continues & price will continue to drop

▶️If all USPs debts are repaid, the position will close

8/ Any outstanding collateral after completing liquidation would be returned to the position owner.

And that's it for how liquidation works. Please check out our yellow paper (section 2.6) for full details 👇
bit.ly/3F0pLej