↪ Liquidations

• Overview

Each account's health on HyperLend is determined by a single value known as the health factor. This figure summarizes how well your portfolio is collateralized, effectively measuring its overall health.

$$H_f = \frac{\sum \text{Collateral}_i \text{ in ETH} \times \text{Liquidation Threshold}_i}{\text{Total Borrows in ETH}}$$

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• Liquidation

Liquidation occurs when a borrower's health factor falls below 1, indicating that their collateral value no longer sufficiently covers their loan/debt value. This situation can arise if the collateral decreases in value or the borrowed debt increases in value relative to each other. During a liquidation, a portion of the borrower's debt is repaid, and this amount plus a liquidation fee is deducted from the available collateral. Consequently, the liquidated debt portion is repaid.

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• Liquidation Penalty

The liquidation penalty, or bonus for liquidators, varies based on the collateral asset. You can find the liquidation fee for each asset in the risk parameters section. For example, Joe deposits 5 ETH (when ETH is worth 1000 USDC) and borrows 4000 USDC. The next day, ETH value falls to $810, at which point Joe's health factor falls below 1. Since it's now below the liquidation threshold, a liquidator can repay the 4000 USDC loan and claim the 5 ETH (worth 4050 USDC, which they can immediately sell for a profit).

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• Avoiding Liquidation

To prevent liquidation, you can improve your health factor by depositing more collateral assets or repaying part of your loan. Generally, repayments boost your health factor more significantly than deposits. It's crucial to monitor your health factor and maintain it at a high level to avoid liquidation. For instance, keeping your health factor above 2 provides a greater margin of safety.