Liquidation Incentives
Overview
Liquidation incentives are a key feature of decentralized lending platforms like Moria Protocol, ensuring loans remain secure and the MUSD stablecoin stays pegged to USD. When a loan's collateral value drops below the required threshold, anyone can step in to repay the loan and claim the collateral. This mechanism protects the protocol from losses and maintains its stability.
How Liquidations Work
The maximum loan amount is calculated as 83.33% of the collateral value (LTV). This means that loans require a minimum collateral ratio of 120% to remain healthy.
Liquidation happens when a loan's total owed amount (principal plus interest) exceeds this safe borrowing limit, calculated using the current value of the collateral and BCH price. At this point:
- Any user can repay the loan using MUSD.
- The user claims the full collateral, including up to 20% bonus compared to the repaid value.
This process ensures risky loans are resolved quickly, preventing bad debt from accumulating.
Incentive Structure
Moria offers a liquidation bonus of up to 19.9%, making it highly attractive for users to liquidate risky loans. The liquidation bonus becomes available when a loan's collateral ratio falls below 120%. This threshold ensures there's buffer to cover the liquidation bonus and protect the protocol. The high penalty encourages users to monitor and act on risky loans, keeping the protocol healthy.
Example of Liquidation
Imagine a loan with a $1,200 principal backed by collateral worth $1,800 when BCH is priced at $600. As BCH price drops and interest accumulates, the loan-to-value (LTV) ratio increases. For example: - At a BCH price of $450, the collateral is worth $1,350, and the total owed is $1,240 (principal + interest). - A liquidator can repay the $1,240 and claim the $1,350 collateral, earning a $110 bonus.
This table shows how the bonus emerges as collateral coverage drops:
| BCH Price | Collateral Value | Interest | Total Owed | LTV | Collateral Coverage | Liquidation Bonus |
|---|---|---|---|---|---|---|
| $600.00 | $1,800.00 | $10.00 | $1,210.00 | 67.22% | 148.76% | N/A |
| $500.00 | $1,500.00 | $30.00 | $1,230.00 | 82.00% | 121.95% | N/A |
| $475.00 | $1,425.00 | $35.00 | $1,235.00 | 86.67% | 115.38% | $190.00 |
| $450.00 | $1,350.00 | $40.00 | $1,240.00 | 91.85% | 108.87% | $110.00 |
Industry Comparison
Moria's liquidation parameters compared to other protocols:
| Protocol | Maximum LTV | Liquidation Penalty |
|---|---|---|
| Liquity V2 ETH | 91% | 5% |
| Moria | 83% | up to 19.9% |
| Aave v3 (ETH) | 80% | 5% |
| Compound V3 (ETH) | 80% | 10% |
| MakerDAO | 67-77% | ~13% |