Loan Liquidation Model
The liquidation mechanism is applied to ensure that SIKKA remains fully backed by MATIC collateral. When the price of your collateral goes under a certain value, the liquidation process may be triggered and your collateral may be sold in a Dutch auction.
The liquidation model is best described by the following example:
| Step/Variable | Value |
|---|---|
| Price of 1 unit of collateral | $2 |
| Liquidation ratio | 75% |
| Price of collateral with liquidation ratio | $1.5 |
| User deposits 10 units of collateral | 10 * 2 = $20 |
| Borrow limit | user_deposit * liquidation_ratio = 20 * 0.75 = $15 |
| User borrows $15 of SIKKA | 15 SIKKA |
| Price of 1 unit of collateral decreases and now is | $1.8 |
| Collateral unit price, with safety margin | _current_price_of_collateral_unit * liquidation_ratio = 1.8 * 0.75 = $1.44 |
| Current worth of collateral, with safety margin | price_of_colatteral_with_safety_margin * amount_of_collateral = 1.44 * 10 = $14.4 |
| Trigger for liquidation | borrowed_amount - current_worth_of_colateral = 15 - 14.4 = $0.6, which is >$0 |
| Somebody starts a Dutch auction to liquidate the collateral. Starter is sent tip + chip as a reward for it, from Sikka reserves | 300 + (16.95 * 0.01) = $300.169 |
| User collateral that goes to Dutch auction | 10 units |
| Liquidation penalty (fixed by Sikka governance) | 13% of the debt |
| Debt to cover in the auction | borrowed_amount * liquidation_penalty = 15 * 1.13 = $16.95 |
| buf (percentage similar to liquidation penalty, fixed by Sikka governance) | 2% |
| top (start auction price of 1 unit of collateral) | current_price_of_collateral_unit * buf = 1.8 * 1.02 = $1.836 |
| Auction starts and price gradually decreases. Anybody can come and buy any amount of the liquidated collateral | |
| tau (time in seconds until price is 0; fixed by Sikka governance) | 21600 |
| dur (time in seconds elapsed since the auction start; fixed by Sikka governance) | e.g. 600 |
| Linear decrease of price of 1 unit of collateral | top * ((tau - dur) / tau) = 1.836 * ((21600 - 600) / 21600) = $1.785 after 600s of the auction |
| Somebody restarts the auction based on: — tail (specific amount of time elapsed; fixed by Sikka governance) OR — cusp (% of price drop; fixed by Sikka governance) | — — 40% of top = 0.40 = $0.7344 |
| tip (flat fee given as a reward to auction starter/restarter; fixed by Sikka governance) | $300 |
| chip (dynamic fee given as a reward to auction starter/restarter; fixed by Sikka governance) | %0.1 of the amount of debt in the auction |
| Restarter is sent tip + chip as a reward, from Sikka reserves | 300 + (16.95 * 0.01) = $300.169 |