Liquidation
is the process of selling assets
that have been used as collateral
to repay a debt
when a borrower
fails to meet their loan obligations.
To minimize the risk of liquidation, borrowers
should regularly monitor their Credit Remaining.
It is crucial to ensure that the Credit Remaining
is greater than a value of $0
and remains above 0%
.
According to Moonwell Docs, one of the factors that affect Credit
is:
Changes in Collateral Value
The value of the provided collateral can directly impact the amount of credit available. Fluctuations in collateral value can either increase or decrease the available credit. Borrowers should be aware of these fluctuations and adjust their borrowing activities accordingly.
When a loan becomes undercollateralized
, either due to decreased collateral value
or increased borrowed amount
, liquidators
step in to protect depositors
and potentially profit themselves.
This means that a user's collateral
may fluctuate
and adversely decrease
the available credit so much to zero in the worst case. At this point, this user is eligible for liquidation but due to the undervalued collateral, there are no incentives
to liquidate him.
In the MErc20DelegateFixer::fixUser()
function, there is a check to determine the current amount
for a user
that we'll transfer to the liquidator
:
It then checks if the liquidated != 0
before carrying out the transfer to the liquidator
:
This means that there is a possibility that there are no tokens to be transferred to the liquidator in the event of extreme undercollateralization
which implies that that the liquidator
stands to make no profit
from this liquidation
process since there is not even enough to cover for the debt clearance.
Ideally, no liquidator
would want to be in this scenario and therefore, there are higher chances that all undercollateralized users
may never be liquidated, a fact that would eventually result in the protocol going underwater
.
Manual Review
A potential fix would be to set a minimum threshold below which collateral value must not fall before liquidation occurs.
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