Liquidation Mechanisms

Process and Conditions for Liquidations

In Circularity Finance, the liquidation process is a critical component for maintaining the stability and integrity of the platform, especially in the context of loans and collateralized assets.

1. Trigger for Liquidation: A loan enters the liquidation process when it loses 40% of its original value at the time the loan was issued. This significant devaluation triggers a risk mitigation protocol to protect the platform's financial health.

2. Role of Decentralized Buyer of Last Resort: Upon triggering a liquidation, the protocol employs the concept of a "Decentralized Buyer of Last Resort." This mechanism utilizes funds from the Money Market Fund (MMF) to purchase the liquidated asset. This action stabilizes the protocol by preventing the asset from becoming under-collateralized and mitigating further risk.

3. Governance and Execution of Liquidations: Liquidations are overseen and executed by designated Governors of the ecosystem, identified through a special governor NFT. In scenarios of heightened demand, VIP NFT holders are also eligible to participate in liquidation events.