Liquidations

Overview

Nazca.money facilitates autonomous overcollateralized lending, ensuring that a borrower's collateral is always valued higher than their borrowed balance. This is crucial to safeguard the protocol and its lenders from potential losses.

While liquidations on Nazca.money are designed to be infrequent occurrences, extreme market conditions can lead to scenarios where a borrower's equity becomes insufficient, triggering a liquidation process. This involves selling off a portion of the borrower's collateral to repay the debt.

Liquidation Mechanics

The liquidation process on Nazca.money closely mirrors liquidation on Compound V2. Accounts become eligible for liquidation when their liquidity (aggregate collateral factor of their assets) turns negative.

Liquidation Process

• Third-party liquidators, often automated bots, can pay off some of the borrower's debt and seize the corresponding collateral at a slight discount, as incentivized by the protocol.

• A portion of the collateral is also redirected to the Insurance Fund

Liquidation is initiated by calling the liquidateBorrowfunction on the relevant nToken contract, aligning with the technical framework provided in Compound V2 documentation.

Bad Debt and Protocol Stability

Nazca.money aims to maintain positive equity in all accounts. In rare cases of extreme volatility, bad debt may accrue if an account’s equity turns negative before liquidation. The protocol is structured to minimize the occurrence of bad debt, with asset selections typically being very stable.

As a preventive measure against external manipulation, stablecoin oracles on Nazca.money are designed to never price them above a certain threshold (e.g., 1 USDB).

In the rare event of bad debt, Nazca.money's Insurance Fund are used first to cover losses. Should the fund be insufficient, there may be limitations on lenders' ability to withdraw their assets.