Skip to main content

Liquidation

Morpho (formerly known as 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 to calculate the LTV of a position?​

To compute the LTV of a position on Morpho, use the following formula:

LTV=BORROWED_AMOUNT  ∗  ORACLE_PRICECOLLATERAL_AMOUNT  ∗  ORACLE_PRICE_SCALELTV = \frac{BORROWED\_AMOUNT \space\space * \space\space ORACLE\_PRICE}{COLLATERAL\_AMOUNT \space\space * \space\space ORACLE\_PRICE\_SCALE}

where:

  • BORROWED_AMOUNT\scriptsize{BORROWED\_AMOUNT} = the amount of borrowed assets of the user,
  • ORACLE_PRICE\scriptsize{ORACLE\_PRICE} = the oracle price returned by the oracle of the market,
  • COLLATERAL_AMOUNT\scriptsize{COLLATERAL\_AMOUNT} = the amount of collateral assets provided by the user,
  • ORACLE_PRICE_SCALE\scriptsize{ORACLE\_PRICE\_SCALE} = 1e361e36.

Also, you can find:

How Liquidations Work​

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

No fee is taken by the Morpho protocol at this level. The entire Liquidation Incentive Factor (LIF) goes to the liquidator.

The LIF depends on the LLTV of the market, according to the following formula:

LIF=min(M,1β∗LLTV+(1−β))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.

Example​

Liquidation Calculus

  • A borrower provided $100 of collateral in market A, that has an LLTV of 80%.
  • The Liquidation Incentive Factor (LIF) is approximately 1.06 (as per the calculation or the picture above).

If the borrower’s debt reaches just above $80 (like $80.00001), the position is liquidatable as the Loan-To-Value (LTV) is just above 80%.

A liquidator can repay the borrower’s debt of approximately $80 and:

SeizableAssets=debtAmount∗LIF=80∗1.06=84.8SeizableAssets = debtAmount * LIF = 80*1.06 = 84.8

The Liquidator will thus seize up to $84.8 of collateral, leaving the borrower with $15.2 of collateral.