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.

Liquidations From the Perspective of a Vault Owner‌

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. 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. 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. 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.