Liquidations

In Mutuum, liquidations occur when a borrower’s Stability Factor dips below a predetermined threshold, indicating their collateral no longer sufficiently backs the loan. This threshold accounts for market volatility, real-time price feeds, and risk parameters established for each asset. Once the protocol detects under-collateralization, it flags the position for liquidation. Third-party liquidators can then repay a portion of the debt, receiving the borrower’s collateral at a discount. This process reduces the outstanding debt while freeing up liquidity in the pools or resolving risk in a P2P agreement, thus preventing broad systemic issues.

When a liquidation is triggered, liquidators step in by covering part or all of the borrower’s undersecured debt. In return, they buy collateral at a liquidation penalty rate that rewards them for mitigating the protocol’s exposure to bad debt. Because all borrowing within Mutuum requires overcollateralization, these liquidators typically face minimal risk if they act promptly. Meanwhile, borrowers have the option to add more collateral or repay debt before reaching the critical threshold to avoid liquidation. By aligning incentives and maintaining strict margin requirements, Mutuum ensures a robust safety net that upholds the protocol’s solvency across both its P2C and P2P environments.