Liquidation

When a user's borrowed amount, including accrued interest, surpasses their borrowing limit, liquidation occurs. Essentially, this happens when the user's health factor drops below 1. The health factor is calculated using the following formula:

During liquidation, liquidators pay off a portion of the borrower's debt to increase the borrower's health factor above 1. The maximum portion of the loan that can be repaid is determined by the close factor, which is initially set at 50%. The close factor can be modified through governance.

In exchange for repaying the loan, liquidators receive the borrower's collateral at a discounted rate, represented by tTokens. The formula to compute the discounted tToken amount is:

Liquidators receive tTokens, which they can redeem as if they had provided the asset themselves. Currently, the liquidation incentive is set at 1.08.