Before opening the position, I first think about a way out. This habit comes from losing a few times. After a liquidation, the残局 is worst when you’re left with only the words “zero.” Losses don’t evaporate suddenly—they flow through the terms and end up in the hands of the liquidator, the protocol reserve, and the FT holders. Who takes what burden must be understood before you enter.
In a scenario with about 2000 USDC of debt, the collateral value drops, pushing the LTV to the LLTV level. The liquidation debt is settled at 1000 USDC. Focus on those 1000—not because they’re special, but because every later penalty and allocation is calculated downstream from them. Liquidation is not just “going to zero”; it’s a chain of destinations.
First segment: the liquidator takes it. The penalty for liquidation debt is 10%—half of the 100 USDC, i.e., 5% and 50 USDC—used as a reward for the liquidator. The debt price and collateral price are both set to 1.00 for verification: 1000 × 1.00 × (1 + 5%) ÷ 1.00 = 1050 USDC worth of collateral, of which 1000 is used to repay the debt, and 50 is the incentive to “keep the operation going.”
Second segment: the protocol reserve takes the other half. For the same 1000 USDC debt, the other 5% penalty is also 50 USDC, calculated as 1000 × 1.00 × 5% ÷ 1.00. Two lots of 50 USDC add up to 100 USDC—exactly equal to 10% of the penalty. When the books balance, it’s harder to be dismissed with a single line about who gets which segment.
My fifth segment, my old rule: before opening the position, make sure you understand the failure path. The liquidator takes the reward, the protocol reserve takes the other half. The unpaid portion is not automatically covered by the protocol. Bad debts stay in the market, not pushed into a big pot. That doesn’t mean the risk is smaller—it only means the loss allocation is written into the market boundary.
The remaining portion that’s still not repaid after the liquidation window will go through physical settlement. In the redemption pool composed of underlying tokens and collateral tokens, FT holders receive the assets pro rata. There’s no free picking, and no side is “protected” into zero risk. The party that absorbs the remaining gap simply ends up on the holders’ side.
I’m familiar with this taste—first, look at the cost.
@TermMax , this destination breakdown, I will tuck it back into the opening order. The liquidation trigger, the 10% penalty split in half, and the unpaid portion going to physical delivery—all three must be checked. Work backward to trace exactly who takes what burden; only then does the safety buffer tell you where it should be kept. If the exit is unclear, don’t rush even if the earlier profits look great. #TermMax
In a scenario with about 2000 USDC of debt, the collateral value drops, pushing the LTV to the LLTV level. The liquidation debt is settled at 1000 USDC. Focus on those 1000—not because they’re special, but because every later penalty and allocation is calculated downstream from them. Liquidation is not just “going to zero”; it’s a chain of destinations.
First segment: the liquidator takes it. The penalty for liquidation debt is 10%—half of the 100 USDC, i.e., 5% and 50 USDC—used as a reward for the liquidator. The debt price and collateral price are both set to 1.00 for verification: 1000 × 1.00 × (1 + 5%) ÷ 1.00 = 1050 USDC worth of collateral, of which 1000 is used to repay the debt, and 50 is the incentive to “keep the operation going.”
Second segment: the protocol reserve takes the other half. For the same 1000 USDC debt, the other 5% penalty is also 50 USDC, calculated as 1000 × 1.00 × 5% ÷ 1.00. Two lots of 50 USDC add up to 100 USDC—exactly equal to 10% of the penalty. When the books balance, it’s harder to be dismissed with a single line about who gets which segment.
My fifth segment, my old rule: before opening the position, make sure you understand the failure path. The liquidator takes the reward, the protocol reserve takes the other half. The unpaid portion is not automatically covered by the protocol. Bad debts stay in the market, not pushed into a big pot. That doesn’t mean the risk is smaller—it only means the loss allocation is written into the market boundary.
The remaining portion that’s still not repaid after the liquidation window will go through physical settlement. In the redemption pool composed of underlying tokens and collateral tokens, FT holders receive the assets pro rata. There’s no free picking, and no side is “protected” into zero risk. The party that absorbs the remaining gap simply ends up on the holders’ side.
I’m familiar with this taste—first, look at the cost.
@TermMax , this destination breakdown, I will tuck it back into the opening order. The liquidation trigger, the 10% penalty split in half, and the unpaid portion going to physical delivery—all three must be checked. Work backward to trace exactly who takes what burden; only then does the safety buffer tell you where it should be kept. If the exit is unclear, don’t rush even if the earlier profits look great. #TermMax