4.5 Liquidations

The liquidation process aims to protect the stability of the platform and mitigate risks associated with leveraged positions. While the specific details may vary based on the platform's design and rules, here's a general explanation of how liquidations will work on ChopSui:

Collateralization Ratio: ChopSui will set a collateralization ratio for leveraged positions. This ratio represents the minimum value required for the collateral to support the borrowed funds. For example, if the collateralization ratio is set at 150%, the value of the collateral should be at least 1.5 times the borrowed amount.

Monitoring and Thresholds: The platform continuously monitors the collateral value of leveraged positions. If the value of the collateral falls below a certain threshold, which is usually tied to the collateralization ratio, the position may be at risk of liquidation. Liquidation Trigger: When a leveraged position's collateral value falls below the liquidation threshold, the liquidation process is triggered. This is done to protect lenders and maintain the stability of the system.

Auction Mechanism: Upon liquidation, ChopSui may initiate an auction mechanism. The platform will attempt to sell a portion of the collateral to repay the borrowed funds and cover any outstanding fees. The auction process typically involves offering the collateral at a discounted price to incentivize buyers.

Discount and Repercussions: To ensure the successful sale of the collateral, a discount is often applied during the auction. This discount helps attract buyers and facilitates the quick repayment of the borrowed funds. However, the discount means the borrower may experience losses due to the lower value received for the collateral.

Repayment and Remaining Funds: Once the auction concludes, the proceeds from the collateral sale are used to repay the borrowed funds and cover any associated fees. If the proceeds exceed the borrowed amount and fees, the remaining funds are typically returned to the borrower.

Users should carefully review the whitepaper to understand the liquidation process and associated risks before engaging in leveraged positions on ChopSui.