Liquidation
Overview
Elara Protocol facilitates secure overcollateralized lending, ensuring that a borrower's collateral value always exceeds their borrowed balance. This mechanism is crucial for protecting the protocol and its lenders from potential losses. While Elara is designed to minimize liquidations, extreme market conditions may lead to scenarios where a borrower's position becomes undercollateralized, triggering the liquidation process.
Liquidation Mechanics
ElaraLend's liquidation process is inspired by Compound V2. Accounts become eligible for liquidation when their overall health factor falls below 1, indicating that the total value of collateral no longer adequately covers the borrowed amount.
Liquidation Process
Liquidation Trigger: When an account's health factor drops below 1, it becomes eligible for liquidation.
Liquidator Action: Third-party liquidators, often automated bots, can repay a portion of the borrower's debt and receive the corresponding collateral at a slight discount.
Collateral Seizure: The liquidator receives the discounted collateral, with a small portion directed to Elara's Insurance Fund.
Cross-Pool Handling: For cross-pool borrowing, the liquidation process automatically manages the settlement across different pools.
Liquidation Function
Liquidators initiate the process by calling the liquidateBorrow function on the relevant Elara token contract.
Risk Mitigation and Protocol Stability
Elara implements several measures to maintain protocol stability and minimize bad debt:
Real-time Monitoring: Continuous tracking of account health factors.
Gradual Liquidation: Allows for partial liquidations to avoid market impact.
Price Oracle Safeguards: Implements upper bounds for asset prices, particularly for stablecoins and LSTs, to prevent manipulation.
Bad Debt Handling
In rare cases of extreme market volatility, bad debt may accrue if an account's collateral value falls dramatically before liquidation can occur. Elara's approach to bad debt:
Insurance Fund: Primary mechanism for covering any accrued bad debt.
Pool Isolation: The two-layer structure helps contain risks within specific pools.
Withdrawal Limitations: In extreme scenarios, temporary restrictions on asset withdrawals may be implemented to protect the protocol's overall health.
Liquidation Incentives
To ensure timely liquidations, Elara offers a liquidation bonus to incentivize liquidators. This bonus varies based on the asset type and current market conditions.
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