Loan Liquidation

To prohibit borrowers from defaulting on their loans, Lucra incentivizes liquidators to observe and liquidate loans with an LTV ratio above the allowed maximum. The Liquidation Contract is used to convert collaterals of a liquidating loan to NEPRI nYUSD stablecoins, which are then used to repay the loan.

The Liquidation Contract acts as an over-the-counter (OTC) exchange between ERC-20-compliant collateral tokens and NEPRI nYUSD stablecoins. Using Lucra's Oracle Contract as a price feed, conversions between any arbitrary ERC-20 token-based assets and NEPRI nYUSD stablecoins are facilitated.

In addition to collateral liquidation, the Liquidation Contract will handle calculations of collateral liquidation amounts in cases of partial collateral liquidation.

Bids

Collateral tokens are liquidated to NEPRI nYUSD stablecoins by executing bids submitted to the Liquidation Contract. Bids are purchase offers for ERC-20 tokens in exchange for NEPRI nYUSD stablecoins, typically submitted by those that hold NEPRI nYUSD stablecoins, and are wishing to exchange their stablecoins with a certain ERC-20 token.

Properties

Bids are characterized by four properties: bidder, asset, size, and premium rate.

Bidder

The bidder of a bid is the account that has submitted the bid. When a bid is executed, the purchased ERC-20 tokens are sent to this account.

Asset

A bid's asset refers to the ERC-20 token that the bidder is hoping to purchase. Any token that complies with the ERC-20 standard is supported as long as a price feed is provided by the Oracle Contract.

Size

The size of a bid is the amount of NEPRI nYUSD stablecoins that were put up upon bid submission. This is the amount of stablecoins that the bidder will use to purchase the specified ERC-20 token.

Premium Rate

The premium rate of a bid is the rate of premium that the bidder is demanding upon bid execution. If set to a non-zero value, the bidder can purchase ERC-20 tokens at a price cheaper than the current oracle price. While bidders are able to set premium rates of their own, the Liquidation Contract limits the maximum submittable value to 30%.

Bid Submission / Retraction

There can exist at most one bid per asset type per bidder -- existing bids should be retracted before submitting a new bid with different properties (i.e. premium rate).

Any user with a NEPRI nYUSD stablecoin balance can submit a bid to a Liquidation Contract with the matching stablecoin denomination. Bidders are required to specify the ERC-20 token address of purchasing asset and their preferred premium rate.

A submitted bid can be retracted at any time, provided that the bid has not been fully executed. Users can specify the retract amount, and if not specified, the entire bid is retracted.

Bid Execution

Bids can be executed when a user desires to convert their ERC-20 assets for NEPRI nYUSD stablecoins. Bid executors should specify a bidder to execute on, from which the specified bidder's bid is executed. The bidder receives the ERC-20 asset sent by the user, and the user receives the bidder's stablecoin, minus the bidder premium. Executors are allowed to designate a different account to receive the converted stablecoins (optional).

For external contracts (e.g. money market) interacting with the Liquidation Contract, a fee address can be set to receive 1.5% of the executed bid's stablecoins.

Collateral Liquidation

A loan position's risk ratio, defined as the liability to borrow limit ratio, characterizes a position's riskiness. Loans are open for anyone to liquidate when its risk ratio is greater than one.

$$\text{riskRatio} = \frac{\text{liability}}{\text{borrowLimit}}$$

Partial Liquidation

Loans with a total collateral value of above 500 nYUSD are partially liquidated, with only a portion of collateral liquidated instead of liquidating the full amount. Locked collaterals are fully liquidated for loans with a total collateral value below 500 nYUSD.

Partially liquidating loan positions are liquidated until the position reaches below the safe risk ratio of 0.8; loan positions with a risk ratio of 0.8 or below are considered safe from under-collateralization. Collaterals are liquidated proportionally to their locked amounts and the position's liquidation factor:

$$\text{liquidationAmount}_{\text{collateral}} = \text{liquidationFactor} \cdot \text{amountLocked}_{\text{collateral}}$$

Where a loan position's liquidation factor is determined as a function of the loan's total collateral value, borrow limit, and liability.

$$\text{liquidationFactor} = \frac{\text{liability} - \text{safeRiskRatio} \cdot \text{borrowLimit}}{\text{collateralValue} \cdot \text{feeDeductor} - \text{safeRiskRatio} \cdot \text{borrowLimit}}$$

The liquidation factor accounts for fees lost during bid execution( $\text{feeDeductor}$ ), such as the premium rate of bids, fees applied on bid execution, and taxes charged on native NEP transfers:

$$\text{feeDeductor} = (1-\text{maxPremiumRate}) \cdot(1-\text{executionFee})\cdot(1-\text{NEPTax})$$

Note that $\text{feeDeductor}$ uses the maximum rate of fees that can be applied during liquidation, liquidating slightly more collateral than the minimum required (to reach the safe risk ratio).

Bid Execution

Collaterals locked to a liquidated loan position are converted to NEPRI nYUSD stablecoins through bid execution. The money market executes bids that were submitted by the loan liquidator, and stablecoins received from execution are used to repay the liquidated borrower's loan.

The money market sets the execution fee address to its yield reserve, transferring 1.5% of the bid value to the yield reserve.