Liquidation

Overview

Mage Protocol facilitates autonomous overcollateralized lending, ensuring that a borrower's collateral always exceeds their borrowed balance. This is paramount to safeguard the protocol and its lenders from potential losses. While liquidations on Mage Protocol are intended to be rare occurrences, extreme market conditions can lead to scenarios where a borrower's equity becomes insufficient, triggering a liquidation process. This involves selling off a portion of the borrower's collateral to repay the debt.

Liquidation Mechanics

The liquidation process on Mage Protocol closely mirrors liquidation on Compound V2. Accounts become eligible for liquidation when their liquidity (aggregate collateral factor of their assets) turns negative.

Liquidation Process

Third-party liquidators, often automated bots, can pay off some of the borrower's debt and seize the corresponding collateral at a slight discount, as incentivized by the protocol. A portion of the collateral is also redirected to the Insurance Fund. Liquidation is initiated by calling the liquidateBorrow function on the relevant mToken contract.

Bad Debt and Protocol Stability

Mage Protocol aims to maintain positive equity in all accounts. In rare cases of extreme volatility, bad debt may accrue if an account’s equity turns negative before liquidation. The protocol is structured to minimize the occurrence of bad debt, with asset selections typically being very stable. As a preventive measure against external manipulation, stablecoin oracles on Mage Protocol are designed to never price them above a certain threshold (e.g., 1 USDC). In the rare event of bad debt, Mage Protocol's Insurance Fund is used first to cover losses. Should the fund be insufficient, there may be limitations on lenders' ability to withdraw their assets.