Liquidation

Each collateral asset in the Notional system can be liquidated to re-collateralize an under-collateralized account.

Cash

Liquidators can purchase cash in a currency where the account has a collateral surplus in exchange for cash in a currency where the account has a collateral requirement.

fCash

Liquidators can purchase fCash in a currency where the account has a collateral surplus in exchange for cash in a currency where the account has a collateral requirement.

Liquidity Tokens

Liquidators can force the account to convert their liquidity tokens into their underlying cash and fCash claims. This lowers the risk of the account's portfolio, reduces the impact of the liquidity token haircut, and increases the collateral surplus (or decreases the collateral requirement) in the liquidity token currency.

Liquidating Cash

Example Collateral Position

$$ETH-DAI \text{ } Exchange Rate = 400 \\ETH-USDC \text{ } ExchangeRate = 400 \\ Buffer = 1.4$$

Currency	ETH	DAI	USDC
Local Currency Collateral	+1	-300	0
ETH-Denominated Collateral	+1	-1.05	0

$$FreeCollateral = -.05 \text{ } ETH$$

This account is under-collateralized. A liquidator can purchase a portion of this account's ETH in exchange for DAI at a 6% discount to the Chainlink price. This action decreases the effect of the exchange rate buffer and improves the account's collateral position.

Liquidator purchases .16 ETH for 60.4 DAI.

Currency	ETH	DAI	USDC
Local Currency Collateral	+.84	-239.6	0
ETH-Denominated Collateral	+.84	-.8386	0

$$FreeCollateral = +.0014 \text{ } ETH$$

Liquidating fCash

Liquidating fCash works similarly to liquidating cash with one extra step. The liquidator must first convert the fCash to cash by either selling the fCash on the Notional cash market or by purchasing the fCash at its collateral value. Once the fCash has been converted to cash, liquidation proceeds as normal.

Liquidating Liquidity Tokens

Liquidating liquidity tokens improves an account's free collateral position by increasing the account's collateral surplus, or decreasing the account's collateral requirement, in the liquidity token currency.

Example Account Holdings in Local Currency

Cash: +100

Maturity	fCash	Liquidity Tokens
December 1 2020	0	+150
March 1 2021	0	0
June 1 2021	0	0

This account's liquidity tokens give the account a claim on a certain amount of cash and fCash. Summing the account's cash balance, its cash claims and the present value of its fCash claims gives the Local Currency Collateral figure.

$$Local CurrencyCollateral = Cash + cashClaim +fCashPV \\ ~ \\ Local CurrencyCollateral = 100 + 120 + 102 \\ ~ \\ LocalCurrencyCollateral = 322$$

Converting the account's liquidity tokens into its underlying claims on cash and fCash allows the account to utilize the full value of its holdings as collateral. A liquidator who forces an under-collateralized account to make this conversion is paid a small percentage of the cash withdrawn from the liquidity pool.

Account Holdings After Converting Liquidity Tokens

Cash: +250

Maturity	fCash	Liquidity Tokens
December 1 2020	+150	0
March 1 2021	0	0
June 1 2021	0	0

$$Local CurrencyCollateral = Cash + cashClaim +fCashPV \\ ~ \\ Local CurrencyCollateral = 250 + 0 + 128 \\ ~ \\ LocalCurrencyCollateral = 378$$