Liquidations

How Varla's permissionless liquidation system works — triggers, incentives, and what happens to borrowers and liquidators.

✦ Key Takeaways

Trigger — health factor drops below 1.0
Permissionless — anyone can execute a liquidation (no allowlists)
Partial liquidation — only enough collateral is seized to restore health
Liquidation bonus — 5-15% incentive for liquidators, scales with urgency

When Liquidation Happens

A position becomes liquidatable when its health factor drops below 1.0. This can happen because collateral lost value (PM share price declined), the market is approaching resolution (early-closure decay), or debt grew from accrued interest.

healthFactor = Σ(positionValue × liquidationThreshold) / totalDebt

if healthFactor < 1.0:
  → Position is liquidatable
  → Anyone can call liquidate(borrower, tokenId, amount)

Liquidation Bonus

Liquidators receive a bonus on the collateral they seize — more than the debt they repay. The bonus scales with the severity of undercollateralization.

Health Factor	Bonus	Rationale
~1.0 (just liquidatable)	~5%	Minimal incentive, low risk
~0.9	~10%	Moderate urgency
≤ 0.8	~15%	High urgency, max incentive

Liquidation Flow

1. Liquidator identifies unhealthy position (HF < 1.0)
2. Liquidator calls liquidate(borrower, tokenId, debtToCover)
3. Contract verifies: HF < 1.0, oracle is fresh, amount is valid
4. Debt is reduced: borrower's scaled debt decreases
5. Collateral seized: ERC-1155 positions transferred to liquidator
6. Bonus applied: liquidator receives collateral worth debtCovered × (1 + bonus)
7. Pool repaid: stablecoins flow from liquidator → VarlaPool

For Borrowers

Monitor your health factor. If it's approaching 1.0, either supply more collateral or repay some debt. Liquidation costs you the bonus — up to 15% of seized collateral value.

For Liquidators

Liquidations are permissionless and competitive. Monitor the readAccountSnapshot() SDK helper for positions approaching HF 1.0. The bonus makes liquidation profitable when accounting for gas costs.

Partial vs Full Liquidation

Liquidation aims to restore you to a target health factor (default 1.05) rather than wiping you out entirely. Only enough collateral is seized to bring your HF back to the target.

However, full liquidation may occur when:

Condition	What happens
Severely underwater	Collateral value is so low that partial liquidation can't restore HF to the target
Dust debt remaining	Partial liquidation would leave a tiny remaining debt not worth the gas to manage
Single-position collateral	Only one position to seize, and partial seizure isn't enough

Why Liquidation Can Be Delayed

Liquidation has stricter oracle rules than normal borrowing to protect borrowers from unfair liquidation during oracle outages:

Rule	Detail
Stale price blocks liquidation	If any non-zero collateral has an unavailable price, liquidation is blocked entirely
Grace period after recovery	After oracle comes back online, there's a default 5-minute grace period before liquidation is allowed

This means your position is protected during oracle outages — even though your HF might calculate below 1.0 temporarily, no one can act on it until prices are fresh. See Oracle System for details.

Bad Debt

If collateral value drops below outstanding debt (e.g., a PM position resolves to $0), the remaining shortfall becomes bad debt. This is absorbed first by the protocol reserve fund, then socialized to lenders only as a last resort.

You lose all collateral but don't owe the protocol anything beyond that. There's no personal liability for bad debt — your exposure is limited to the collateral you deposited.