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Liquidation

In Tenor, borrower positions are overcollateralized to protect lenders' capital. If a borrower's collateral declines too much in value, the position is subject to liquidation.

The protocol enforces a health check on all borrowers. If a borrower's health check fails (ex: The risk adjusted value of his debts are greater than the risk adjusted value of his collateral assets) a third party liquidator can trigger a liquidation. In other words if a borrower's Loan-To-Value (LTV) ratio is greater than the Liquidation Loan-To-Value (LLTV) his collateral can be liquidated to repay his debts. The LTV is calculated with the following formula:

LTV=Borrowed AmountCollateral Amount×Oracle Price×100%LTV = \frac{\text{Borrowed Amount}}{\text{Collateral Amount} \times \text{Oracle Price}} \times 100\%

Liquidations are executed by liquidators who are incentivized to repay the borrower's debt by purchasing the collateral assets at a discount to its oracle price. The liquidation bonus for Tenor markets is inherited from Morpho. The Morpho market liquidation bonus parameter is set as a ratio of the LLTV.

Example​

Consider a situation where:

  • A user deposits 1 cbBTC as collateral (valued at $80,000 with BTC at $80,000).
  • The maximum LTV (LLTV) for this market is 86%.
  • They decide to borrow $64,000 USDC.

Initially, their LTV would be:

LTV=64,00080,000×100%=80%LTV = \frac{64,000}{80,000} \times 100\% = 80\%

If the price of cbBTC falls to $76,000, the collateral value would decrease to $76,000, causing the LTV to rise:

LTV=64,00076,000×100%=84.2%LTV = \frac{64,000}{76,000} \times 100\% = 84.2\%

If BTC falls further to $74,000, the collateral value would be $74,000, pushing the LTV to:

LTV=64,00074,000×100%=86.5%LTV = \frac{64,000}{74,000} \times 100\% = 86.5\%

Since this exceeds the maximum LTV of 86%, the position would become eligible for liquidation.