Loan-to-value and liquidation

Draft

Kadia Lending is in development, not audited and not on mainnet. A test version of the ERG market runs on Ergo testnet (the testnet record). The contracts aren’t final. Every figure marked as a launch parameter comes from the economic model (EM §3), is illustrative until it’s re-frozen before deployment, and can change.

Source: kadia-lending docs/specs/economic-model.md (EM) and docs/specs/lending-design.md (LD) at commit 2bb9256 (2bb92562799019fab6ac95b2576ad94197b6b14f).

Loan-to-value

Loan-to-value (LTV) is what you owe divided by what your collateral is worth, at the oracle’s price. Two levels matter (EM §3):

	ERG market	LP market
Maximum LTV: the highest you can borrow or remove collateral to (launch parameter)	70%	80%
Liquidation threshold: where liquidation becomes possible (launch parameter)	80%	85%

• Your LTV rises when the collateral’s price falls, or as interest adds to your debt.
• It falls when you repay, add collateral, or the price rises.
• The liquidation price is the ERG price at which your LTV reaches the threshold. The app shows it, along with how far ERG can fall before then.

LP collateral moves more slowly than ERG. An ERG/USE LP token holds both assets, so its value moves with roughly the square root of a change in the ERG price (EM §10.3). The app’s price-drop simulator accounts for this.

Liquidation

• Who: anyone, once your LTV reaches the threshold (EM §9.4). It doesn’t depend on any particular bot.
• Partial first. A liquidation repays just enough of your debt to bring the loan back to a safer restore LTV: 70% for ERG, 75% for LP (launch parameters).
• The liquidator’s pay: a bonus taken from your collateral. It’s smallest at the threshold and grows the further past it a loan is:
  • ERG market: 3% to 10% (launch parameters);
  • LP market: 6% to 13% (launch parameters). It’s higher because an LP liquidator receives LP tokens and needs time to turn them back into ERG and USE and sell those (EM §10.2).
• Close. If a partial liquidation can’t restore the loan, the whole loan is closed. If the collateral doesn’t cover the debt, the shortfall is bad debt: the reserve absorbs it first, then lenders (EM §9.4, §7).
• Smaller steps. Liquidators may repay in chunks at the same bonus. A chunk never closes a loan or realises a loss.

Pre-liquidation (optional)

When you open a loan, you can choose softer early terms (EM §9.5). They can’t be changed later.

• From an LTV you pick, below the threshold, anyone may repay a fixed share of your debt for a bonus smaller than a liquidation’s.
• It’s a gentler step, so a falling price costs you less than a full liquidation would.
• Once the loan reaches the threshold, normal liquidation applies.

When the price feed is stale

Some actions pause while the oracle is stale. See The oracle.