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Liquidations

Soft Liquidations​

If a position reaches maturity without being renewed, it is soft liquidated. At that point, a portion of the collateral equal to the outstanding debt is sold to fully settle the position. By default, Tenor automatically renews positions to prevent soft liquidations.

Liquidations​

Positions originated through Tenor are continuously monitored by the Morpho Protocol to ensure sufficient collateralization. If a position’s Loan-to-Value (LTV) ratio exceeds the market’s Liquidation Loan-To-Value (LLTV), it becomes eligible for liquidation.

The maximum amount a user can borrow depends is determined by the Liquidation Loan-To-Value (LLTV). This ratio sets the borrowing limit based on the value of the collateral deposited.

For example, if a market has an LLTV of 80%, that means:

  • A user can borrow up to 80% of the value of their collateral.
  • If the user deposits $1,000 worth of collateral, they can borrow up to $800.

If the value of the position’s LTV becomes greater than the LLTV, the position can be liquidated, meaning that collateral can be sold to repay the loan.

Liquidations can be triggered by third-party liquidators, who repay the borrower's debt in exchange for purchasing the collateral at a discount relative to its oracle price. This discount is defined by the Morpho market’s liquidation bonus parameter, which is typically set as a ratio of the LLTV.

If the liquidation process fails to fully recover the outstanding debt, the position will incur bad debt, resulting in a loss for lenders.

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.