Liquidation

One of MultiLend’s key innovations is that it functions without price feeds. In this scenario, MultiLend introduces an innovative liquidation mechanism, which is a combination of market forces and the utilization of the lending pool.

Liquidation Criterion

Loans which are not fully collateralized with respect to the LUP are eligible for liquidation.

Mathematically, this means loans that satisfy the following inequality can be liquidated:

π‘π‘œπ‘™π‘™π‘Žπ‘‘π‘’π‘Ÿπ‘Žπ‘™π‘™π‘œπ‘Žπ‘›β‹…πΏπ‘ˆπ‘ƒ<π‘‘π‘’π‘π‘‘π‘™π‘œπ‘Žnπ‘π‘œπ‘™π‘™π‘Žπ‘‘π‘’π‘Ÿπ‘Žπ‘™_{π‘™π‘œπ‘Žπ‘›} Β· πΏπ‘ˆπ‘ƒ < 𝑑𝑒𝑏𝑑_{π‘™π‘œπ‘Žn} OR πΏπ‘ˆπ‘ƒ<π‘‘π‘’π‘π‘‘π‘™π‘œπ‘Žπ‘›/π‘π‘œπ‘™π‘™π‘Žπ‘‘π‘’π‘Ÿπ‘Žπ‘™π‘™π‘œπ‘Žπ‘›=π‘‡π‘ƒπ‘™π‘œπ‘Žπ‘›πΏπ‘ˆπ‘ƒ < 𝑑𝑒𝑏𝑑_{π‘™π‘œπ‘Žπ‘›}/ π‘π‘œπ‘™π‘™π‘Žπ‘‘π‘’π‘Ÿπ‘Žπ‘™_{π‘™π‘œπ‘Žπ‘›} = 𝑇𝑃_{π‘™π‘œπ‘Žπ‘›}

Liquidation Grace Period

Once a loan goes to liquidation, the borrower has an hour(grace period) to save it, otherwise anyone may purchase portions of the collateral through a Dutch auction.

If the loan becomes fully collateralized again because of paying down debt (either due to purchases in the auction, or the borrower repaying debt), pledges of additional capital, or the LUP moving up above the loan’s TP, the loan is removed from liquidation. If a loan in auction is fully collateralized after a take, arb-take or deposit-take, the loan is also removed from liquidation.

Liquidation Bond & Auction

MultiLend prevents liquidations from being triggered without a bond. The purpose of the bond is to prevent borrowers from being unfairly liquidated. The Neutral Price (NP) of a loan is set at origination and acts as the liquidation price.

If the auction sells the collateral for more than the position’s liquidation price, some or all of the bond is lost. If the auction sells the loan for less than that liquidation price, the bond is returned plus a reward. In practice, a loan may be profitably liquidated when the market price of the collateral crosses below the liquidation price.

After the first hour of liquidation(a grace period) has passed, anyone may purchase portions of the collateral via a pay-as-bid Dutch auction starting at the greater of 32 Β· 𝑀𝑂𝑀𝑃 or 32 Β· 𝑁𝑃 and exponentially decaying towards 0 with a one hour half life.

The MOMP, or β€œmost optimistic matching price,” is the price at which a loan of average size would match with the most favorable lenders on the book. Technically, it is the highest price for which the amount of deposit above it exceeds the average loan debt of the pool.

It is unlikely that a liquidation would ever settle far below the market value of the collateral because once the auction is showing prices that have deposits, these deposits can be used to bid.

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