Liquidations

When an account's collateral cannot cover its loan amount the collateral must be liquidated to remove bad debt.

Liquidations is the mechanism which allows the protocol to get rid of its bad debt.

When a users collateral value reduces to a point where he has lower collateral than his borrowed amount then he owes the protocol. The users is not incentived to give back the money borrowed. Instead the protocol will liquidate his collateral and buy back the amount the user has borrowed.

Why are Liquidations needed?

Liquidations are required so as to prevent the protocol from having bad debt. Bad Debt is the term used for lent out assets that will not be returned. This occures when the borrowed amount is greater than the collateral amount.

A liquidation will take control over the exact amount of collateral needed to bring the user back to where his debt is backed by the collateral.

This collateral is bought from the protocol at a discount and then sold to repay the debt of the user.

Protocol Triggered Liquidations

Generally, the collateral is bought from the protocol at a discount provided they do the service of paying back the bad debt. This can be done by any user.

Protocol Triggered Liquidations are how liquidations work in Mirai Protocol. The liquidation is done by the protocol itself not reliant on external users. This also allows the protocol to distribute the profit back to the MIRAI stakers rather than one user generating all the profit. PTL also solve the problems related to MEV based liquidation and frontrunning.