Liquidation Mechanism

  • Liquidation:
    CDP needs to always maintain a c-ratio higher than the minimum collateral ratio, otherwise the protocol will initiate a Margin Call to notify the collateral liquidation. The protocol can recalculate the value of all nAssets through the price reported by the oracle to determine whether the position is below the required threshold.
  • Liquidation process:
    There are two common ways of liquidation. One is to directly sell part of the collateral of the borrower through a contract listing at a certain discount, allowing any user to obtain the collateral immediately after paying off the debt on behalf of the borrower for arbitrage. The other way is to auction the collateral publicly starting from the bottom price and gradually increasing the price. NASDEX adopts the former.
  • ‌Enter the liquidation process: liquidation auction → liquidation
    For example, suppose the current asset minimum collateral ratio threshold is set to 150%. Assuming that collateral that is worth 200USDC are deposited and nAssets that are worth 100USDC are minted, the collateral ratio at the beginning is 200%.
    When the nAsset price increases to a point that the minted nAssets' value exceeds 133USDC, the current collateral ratio will drop below the 150% min. collateral ratio. At this point, NASDEX program will trigger the margin call and all liquidators are able to start liquidating this position by buying the position owner's collateral at a discount price. This auction process will last until the collateral ratio gets back over 150%.