Liquidations

Protocol Safety Mechanism

Liquidations are a critical safety feature that protects Everst from insolvency. When a borrower's position becomes under-collateralized due to market movements, liquidators can repay part of the debt and claim collateral at a discount.

When Liquidations Occur

The Trigger Point

Liquidation occurs when:

Health Factor < 1.0

This happens when your borrowed value approaches your collateral's liquidation threshold.

Real Example

Initial Position:
- Supplied: 10 AAPL stock tokens worth $20,000
- AAPL Liquidation Threshold: 80%
- Borrowed: 12,000 USDT
- Health Factor: ($20,000 × 0.80) ÷ 12,000 USDT = 1.33 (Safe)

AAPL drops to $140 per share:
- Collateral Value: 10 AAPL @ $140 = $14,000
- Health Factor: ($14,000 × 0.80) ÷ 12,000 USDT = 0.93 (Liquidation!)

The Liquidation Process

Liquidation Flow

Complete liquidation process from trigger to completion

Step-by-Step Breakdown

  1. Position Becomes Unsafe

    • Market movements cause Health Factor < 1.0

    • Position flagged for liquidation

  2. Liquidator Acts

    • Anyone can act as a liquidator

    • Liquidator repays up to the configured close factor of the debt

    • Transaction submitted to blockchain

  3. Debt Repayment

    • Liquidator's funds repay borrower's debt

    • Interest included in repayment

  4. Collateral Transfer

    • Liquidator receives collateral worth repaid amount

    • Plus configurable liquidation incentive bonus

    • Transferred directly to liquidator's address

  5. Position Update

    • Remaining debt reduced

    • Remaining collateral reduced

    • Health Factor restored above 1.0

Liquidation Example

Before Liquidation:
- Collateral: $10,000 worth of TSLA stock tokens
- Debt: 8,500 USDT
- Health Factor: 0.94

Liquidator Action:
- Repays: 4,250 USDT (portion of debt up to close factor)
- Receives: Collateral worth more than repaid amount (includes liquidation incentive)
- Profit: $340

After Liquidation:
- Remaining Collateral: $5,410 worth of TSLA
- Remaining Debt: 4,250 USDT
- Health Factor: 1.02 (Safe again)
- Borrower Loss: $340 (liquidation penalty)

Everst's Hybrid Liquidation Engine

Dual-Path System

Everst employs a unique two-tier liquidation system for maximum efficiency:

1. Onchain DEX Liquidation (Primary)

  • Execution: Instant via smart contracts

  • Liquidity Source: PancakeSwap, 1inch aggregator

  • Speed: Same block execution

  • Best for: Liquid assets (USDT, major stock tokens)

2. Offchain Broker Network (Fallback)

  • Execution: Via partnered market makers

  • Liquidity Source: OTC desks, traditional brokers

  • Speed: 1-5 minutes

  • Best for: Stock tokens, less liquid assets

How It Works

Liquidation Triggered
        ↓
Check DEX Liquidity
        ↓
Sufficient? → Execute on DEX → Complete
        ↓
Insufficient? → Route to Broker Network
        ↓
Execute OTC → Complete

This dual system ensures:

  • Deep liquidity for all assets

  • Minimal slippage during liquidations

  • Protection against cascading liquidations

  • Support for stock token positions

Automated Liquidation Architecture

Liquidation Bot Architecture

Technical architecture of Everst's automated liquidation system

The liquidation system operates through automated bots that continuously:

  • Monitor all borrower positions in real-time

  • Identify positions approaching Health Factor < 1.0

  • Calculate profit potential from liquidation opportunities

  • Execute liquidations via the most efficient path

  • Manage collateral through optimal routing strategies

Liquidation Parameters

Key Values

Parameter
Value
Description

Liquidation Incentive

Variable

Bonus for liquidators

Close Factor

Configurable

Max debt repayable per liquidation

Min Liquidation Amount

$100

Minimum profitable liquidation

Liquidation Gas Cost

~$0.50

Typical network transaction cost

Asset-Specific Thresholds

Asset
Collateral Factor
Liquidation Threshold
Safety Buffer
Risk Level

USDT Stablecoin

85%

88%

3%

Low

Blue-chip Stock Tokens (AAPL, MSFT)

75%

80%

5%

Medium

Growth Stock Tokens (TSLA, NVDA)

70%

75%

5%

Medium-High

ETF Indices (SPY, QQQ)

75%

80%

5%

Low-Medium

Safety buffer = difference between max borrow and liquidation

Stock Token Specific Liquidation Risks

Market Hours Factors

  • US Stock Trading Hours: Most active liquidation period

  • After-Hours/Weekends: Relatively less price movement, but liquidations can still occur

  • Holidays: Traditional markets closed but DeFi continues operating

Stock-Specific Risks

  • Earnings Announcements: Earnings season increases liquidation risk due to volatility

  • Major News Events: Breaking news can cause rapid price movements

  • Corporate Actions: Dividends, splits, and other events affect prices

  • Regulatory Changes: Stock-related regulatory policies impact

Volatility Patterns

  • Market Open/Close: Higher volatility during traditional trading hours

  • Earnings Season: Significantly increased liquidation risk during quarterly reports

  • Market Events: Major economic events affect all stock tokens

For Borrowers: Avoiding Liquidation

Prevention Strategies

1. Maintain Safe Health Factor

  • Keep Health Factor > 1.5 for safety

  • 2.0 for volatile stock tokens

  • Monitor regularly during market volatility

2. Diversify Collateral

  • Don't rely on single stock token

  • Mix USDT with stock tokens

  • Reduces single-point failure risk

3. Set Alerts

  • Stock token price alerts

  • Health Factor warnings at 1.5, 1.25, 1.1

  • Daily position summaries

  • Earnings date reminders

4. Have Contingency Plans

  • Keep reserves to add collateral

  • Plan partial repayments

  • Know your liquidation price

  • Prepare rapid response strategies

Calculating Your Liquidation Price

For single collateral positions:

Liquidation Price = Borrowed Amount ÷ (Collateral Amount × Liquidation Threshold)

Example:

Collateral: 10 AAPL stock tokens (80% threshold)
Borrowed: 8,000 USDT

Liquidation Price = 8,000 USDT ÷ (10 × 0.80) = $1,000 per AAPL

Stock-Specific Prevention Measures

Earnings Season Preparation

  • 2 Weeks Before Earnings: Reduce leverage to conservative levels

  • Earnings Day: Avoid new borrowing

  • Post-Earnings: Adjust positions based on results

News Event Management

  • Pre-Major Announcements: Increase Health Factor to > 2.5

  • Regulatory News: Monitor stock-related policy changes

  • Industry Events: Watch for sector-wide impacting news

Technical Analysis Support

  • Support Level Identification: Set liquidation prices above technical support

  • Resistance Monitoring: Watch for potential price ceilings

  • Trend Analysis: Adjust risk exposure based on trends

For Liquidators: Participating in Liquidations

Requirements

  1. Capital: Funds to repay borrower's debt

  2. Technical Setup: Bot or monitoring system

  3. Gas for Transactions: Native tokens for network fees

  4. Risk Management: Handle received collateral

Liquidation Bot Architecture

The liquidation bot continuously monitors positions, identifies unsafe loans, calculates potential profit, executes liquidations through DEX or OTC routes, and manages the received collateral in a continuous cycle.

Profit Calculation

Gross Profit = (Collateral Received × Market Price) - Debt Repaid
Net Profit = Gross Profit - Gas Costs - Slippage

Example:

Repay: 10,000 USDT debt
Receive: Collateral including liquidation bonus
Gas: $0.50
Slippage: $50 (0.5%)
Net Profit: $800 - $0.50 - $50 = $749.50

Stock Token Liquidation Specifics

Liquidity Considerations

  • Large-cap Stocks: AAPL, MSFT typically have better liquidity

  • Small-cap Stocks: May require OTC route for liquidation

  • Time Sensitivity: Best liquidity during US trading hours

Risk Management

  • Price Volatility: Stock token prices can move rapidly

  • Liquidity Risk: Some stock tokens may be difficult to sell immediately

  • Hedging Strategies: Consider immediately hedging received stock tokens

Integration Points

  • Read Functions: getAccountLiquidity(), getBorrowBalance()

  • Liquidation Function: liquidateBorrow(borrower, amount, collateral)

  • Events: Monitor LiquidateBorrow events

  • Oracle Prices: getUnderlyingPrice(asset)

Impact on Different Stakeholders

For Borrowers

  • Loss: Liquidation penalty on collateral

  • Partial liquidation: Up to the configured close factor of debt

  • Immediate execution: No grace period

  • Gas fees: Paid by liquidator, not borrower

For Suppliers

  • Protection: Ensures protocol solvency

  • No direct impact: Unless also borrowing

  • Maintains liquidity: Repaid funds return to pool

For the Protocol

  • Risk mitigation: Prevents bad debt

  • Automatic process: No manual intervention

  • Decentralized: Anyone can liquidate

  • Revenue neutral: Incentive paid from borrower's collateral

Advanced Topics

Cascading Liquidations

In extreme market conditions, liquidations can cascade:

  1. Initial liquidations sell collateral

  2. Selling pressure drops prices further

  3. More positions become unsafe

  4. Cycle continues

Everst mitigates this through:

  • Configurable close factor (partial liquidations)

  • Hybrid liquidation engine (reduces onchain selling)

  • Conservative collateral factors

  • Oracle price averaging

Stock-Specific Cascading Risks

Industry Chain Effects

  • Tech Stock Crash: AAPL, MSFT, NVDA declining simultaneously

  • Financial Crisis: Bank stocks liquidating in sync

  • Regulatory Impact: Entire sectors facing regulatory pressure

Mitigation Measures

  • Industry Diversification: Mix of stock tokens across sectors

  • Tiered Liquidation: Different parameters for different industries

  • Dynamic Adjustment: Risk parameter adjustment based on market conditions

MEV and Liquidations

Liquidations can be subject to MEV (Maximal Extractable Value):

  • Front-running liquidation transactions

  • Back-running oracle updates

  • Sandwich attacks on liquidation trades

Protection mechanisms:

  • Flashloan resistance

  • Minimum liquidation amounts

  • Oracle delay for price updates

Emergency Procedures

Protocol Pause

In extreme circumstances, governance can:

  • Pause new borrows

  • Pause liquidations temporarily

  • Adjust risk parameters

  • Enable emergency withdrawal

Insurance Fund

  • Protocol reserves act as first loss capital

  • Covers shortfalls from failed liquidations

  • Funded by protocol reserve factor

  • Governance controlled

Real-time Monitoring and Alert Systems

For Borrowers

  • Mobile App Push: Instant notifications when Health Factor drops below thresholds

  • Email Alerts: Daily risk reports and market updates

  • SMS Warnings: Emergency liquidation risk notifications

  • Price Tracking: Custom stock token price targets

For Liquidators

  • Arbitrage Opportunities: Real-time profitable liquidation identification

  • Competition Analysis: Monitor other liquidator activity

  • Gas Optimization: Optimal transaction timing suggestions

  • Risk Assessment: Risk analysis of received collateral

Frequently Asked Questions

Q: Can I be liquidated if I only supply? A: No, liquidation only affects borrowers.

Q: Is there a grace period before liquidation? A: No, liquidation is immediate when Health Factor < 1.0.

Q: Can I stop a liquidation in progress? A: No, but you can prevent it by maintaining safe ratios.

Q: What happens to remaining collateral after liquidation? A: You keep any collateral not liquidated and can withdraw if not securing other debt.

Q: Can liquidation be reversed? A: No, blockchain transactions are irreversible.

Q: What's special about stock token liquidations? A: Stock token liquidations may be affected by market hours, earnings events, and industry news, requiring additional monitoring.

Next Steps

  • Avoid liquidation → Review prevention strategies above

  • Understand the process → See step-by-step breakdown above

  • For liquidators → Review liquidator requirements section

  • Risk management → Risk Overview

Liquidations are automatic and irreversible. Maintain safe collateral ratios to avoid losses.

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