# Liquidation rules

When the ratio of loans to collateral in a user's account exceeds a certain limit, the Basic protocol will trigger liquidation, in which the user's collateral is put into the liquidation market and anyone can participate in the liquidation as a liquidator.

### Liquidation Threshold <a href="#liquidation-threshold" id="liquidation-threshold"></a>

Liquidation threshold refers to the value that can be granted when an asset is used as collateral. Since the price of encrypted assets fluctuates greatly, it is impossible to grant the collateral with the full value at real-time prices. For example, if the liquidation threshold for ETH is 85%, then the ETH of $10,000 can be credited as $8,500. In other words, the user can borrow $8,500 by collaterising ETH of $10,000.

### Loan Limit <a href="#loan-limit" id="loan-limit"></a>

Loan limit refers to the maximum amount of the loan calculated from the liquidation threshold of users’ collateral. It results from combining the total value of all assets in the account. When the user converts the deposits to collateral, the user can increase the loan limit.

`Loan limit = ∑ (market value of pledged assets * mortgage rate)`

### Loan Utilisation Rate and Safety Line <a href="#loan-utilisation-rate-and-safety-line" id="loan-utilisation-rate-and-safety-line"></a>

`Loan Utilisation Rate = actual loan/ Loan limit`

Please make sure your loan utilisation rate is below 100%m, otherwise it might trigger liquidation.

In order to prevent the loan utilisation rate from exceeding 100%, the platform set a safety line of 85% based on the loan limit. When users apply the loan, the total loan cannot exceed 85 percent of the value of the collateral.

**Example**: When a user deposits some ETH worth 10k USD, the loan limit shall be 8500 USD with ETH's threshold rate of 85%. If the user applies for a loan, the maximum loan can only be 8500\*85%=7225 USD, where the loan utilisation rate is 85%.

### Liquidation <a href="#liquidation" id="liquidation"></a>

Let's continue the example above. If the price of ETH drops by 10%, the loan limit shall be 9000 USD. With the same ETH's threshold of 85%, the loan limit shall be 7650 USD. In this case, the loan limit is still higher than the actual loan, the liquidation shall not be triggered, but the loan utilisation rate rises to 94%. If the price of ETH drops by 5% again, the value of the collateralised ETH is less than 8500 USD, then the loan limit goes lower than the actual loan of 7225 USD, where the liquidation shall be triggered because the loan utilisation rate exceeds 100%.

When a user’s account is pending liquidation, anyone can buy the collateralised asset at a 7% discount, which is a reward for the liquidator and also a penalty for the borrower.

Liquidators can select and purchase any asset in the account but cannot purchase more than 50% of the total assets at a time. If the account cannot be restored to a normal state after one liquidation, more liquidations can be performed until loan utilisation rate drops below 100%.

**Note**: Users should always watch the loan utilisation rate. The further away from 100%, the safer it is. Closer to 100% means the account is more likely to be liquidated.


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