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Morpho Blue has a liquidation mechanism to mitigate the risk of default and protect lenders’ capital.

When an account becomes unhealthy, meaning its Loan-To-Value (LTV) on a given market exceeds the market’s Liquidation Loan-To-Value (LLTV), the account’s position can be liquidated. Anyone can perform this liquidation by repaying the account’s debt in exchange for the equivalent amount in the market collateral asset, along with an incentive.

To avoid being liquidated, borrowers can track their LTV in real-time and either repay their loan, partially or entirely, either add more collateral to their position.

How Liquidations Work

Liquidations on Blue are quite simple: liquidators can liquidate up to 100% of the account’s debt and receive the corresponding collateral value, plus the relative incentive.

The Liquidation Incentive Factor (LIF) depends on the LLTV of the market, according to the following formula:

LIF=min(M,1βLLTV+(1β))LIF = min(M, \frac{1}{\beta*LLTV+(1-\beta)}),

with β=0.3\beta = 0.3 and M=1.15M= 1.15.

Liquidation Incentive in function of the Liquidation Loan-To-Value.