If an account breaches a vault's minimum collateral ratio, then the account's vault position becomes eligible for liquidation. In this case, a liquidator can purchase the account's vault shares at a discount to the vault shares oracle price.

Liquidation Rate

Parameter selection considerations

Notional governance should set liquidation rates to ensure they provide a sufficient incentive for liquidators to sell vault shares for the borrowed currency. The liquidation rate should generate enough profit for liquidators to cover the following liquidation related expenses:
  • Gas fees
  • Slippage
  • Swap fees
  • Price basis between the Chainlink oracle prices and spot market prices
The amount of money a liquidator will generate is a function of the liquidation rate and the account's size. The liquidation rate * the minimum borrow size should generate enough money for a liquidator to be able to liquidate an account profitably under conservative gas, slippage, and fee assumptions.

Max Develerage Collateral Ratio

The Max Deleverage Collateral Ratio is the maximum collateral ratio (minimum leverage ratio) that a liquidator can bring an account to during liquidation. This effectively mitigates the issue of liquidators liquidating accounts entirely when they breach their minimum collateral ratio.
If an account breaches the vault's minimum borrow size, then a liquidator can liquidate the account entirely, and the Max Deleverage Collateral Ratio won't apply.

Parameter selection considerations

Notional's governance should select a Max Deleverage Collateral Ratio that brings liquidated accounts to a safe leverage ratio. Moreover, the Max Deleverage Collateral Ratio should allow liquidated accounts to be sufficiently deleveraged to avoid liquidating the same account multiple times over short periods of time.