Pre-Liquidation (Auto-Deleveraging)
Pre-Liquidation, also known as Auto-Deleveraging, is an optional, opt-in mechanism that offers an additional layer of safety for borrowers on Morpho. It allows for small, partial liquidations to occur before a position reaches the standard liquidation threshold, helping to automatically reduce risk and prevent a full, more costly liquidation.
Think of it as a "safety zone" where a position can be gently corrected instead of falling off a cliff.
How Pre-Liquidation Works
Standard liquidation is an all-or-nothing event triggered when a position's Health Factor hits 1.0. Pre-liquidation introduces a buffer zone.
- Standard Liquidation: Triggers when
LTV >= LLTV. - Pre-Liquidation: Triggers when
preLLTV <= LTV < LLTV.
A borrower can opt-in to a pre-liquidation contract, defining a preLLTV (Pre-Liquidation Loan-to-Value) that is lower than the market's LLTV. If their LTV enters this zone, a portion of their debt can be liquidated early.
Key Benefits for the Borrower
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Avoids Full Liquidation: The primary benefit is preventing a single, large liquidation event. Instead of losing a significant chunk of their collateral at once, the user experiences smaller, incremental deleveraging.
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Reduced Losses: The incentive (bonus) for pre-liquidators is typically lower than the standard Liquidation Incentive Factor (LIF). This means the penalty paid by the borrower during a partial, pre-liquidation is smaller.
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Automatic Risk Management: It acts as an automated safety net. If a user is away from their screen and their position becomes risky, the pre-liquidation mechanism can help bring their position back to a healthier LTV without their manual intervention.
The Pre-Liquidation Mechanism
When a position enters the pre-liquidation zone, the mechanism works as follows:
- Partial Repayment: A pre-liquidator repays a small percentage of the user's debt. The exact percentage is dynamic and increases as the LTV gets closer to the
LLTV. This is controlled by the preLCF (Pre-Liquidation Close Factor). - Smaller Incentive: The pre-liquidator receives a smaller bonus, defined by the preLIF (Pre-Liquidation Incentive Factor).
- Position Deleveraged: After the pre-liquidation, the borrower's debt is lower, and their LTV is brought back down toward the
preLLTV, returning them to a safer state.
Example: Standard vs. Pre-Liquidation
Consider a user with a position in a market where LLTV is 86% and they've opted into pre-liquidation with a preLLTV of 83%.
| Scenario | Standard Liquidation (No Pre-liquidation) | With Pre-Liquidation |
|---|---|---|
| Trigger | The collateral price drops until LTV hits 86%. | The collateral price drops until LTV hits 84%. |
| Liquidation Event | A liquidator repays 100% of the debt. | A pre-liquidator repays ~12% of the debt. |
| Penalty (Incentive) | The liquidator receives a ~5% bonus (LIF). | The pre-liquidator receives a ~4% bonus (preLIF). |
| Outcome for Borrower | Position is fully closed. The borrower incurs a significant one-time loss. | Position remains open, but with less debt and collateral. The loss is much smaller. |
In this case, pre-liquidation acted as a circuit breaker, preventing a more damaging full liquidation.
Integration Considerations
While pre-liquidation is a powerful safety feature, it is an advanced concept.
- Opt-In Nature: As an integrator, you can choose whether to offer this feature to your users. Because it is opt-in, it requires user authorization.
- Parameter Complexity: Pre-liquidation introduces additional parameters (
preLLTV,preLCF, etc.) that need to be managed and clearly explained. - User Education: If you integrate this feature, it's essential to educate users on how it works, why it's beneficial, and what they are authorizing.
For most integrations, focusing on a robust and clear implementation of the standard liquidation warnings and user flows is the highest priority. Offering pre-liquidation can be a valuable addition for more sophisticated users or as a distinguishing feature of your application.