When a vault's CTL drops below the LR it will then be liquidated. A liquidated vault will have its collateral auctioned off in a process known as a "collateral auction". During collateral auctions, liquidators bid against each other to repay the undercollateralized vault's stablecoin debt in exchange for receiving the vault's collateral at a discount. A liquidated vault will then be charged a liquidation penalty, which will be taken from the vaults underlying collateral.
In our example, we will use an ADA vault with a 200% LR, and a 20% liquidation penalty we will ignore the stability for the sake of simplicity, though it can be calculated for any time-frame since the CTL is a function of the collateral value and the loan value, and the stability fee can easily be calculated for the loan value of the simple equation.
- 1.Alice creates our aforementioned vault on the Ardana platform and collateralizes it with $22,000 worth of ADA, with each ADA token being worth $10
- 2.Alice Generates $10,000 worth of dUSD, making her CTL 220%. The value of ADA drops 10%, making her collateral worth $19,800. (We will assume that this is the price tick in which the liquidation is triggered and the auction is performed and triggered for the sake of simplicity)
- 3.Alice is liquidated and charged a 20% liquidation penalty on her $19,800 collateral, which leaves her with 19,800-19,800*0.2-10,000=$5,840 worth of ADA and 10,000 dUSD.