Liquidations

Seneca's SEN token is a non-algorithmic, collateral-backed stablecoin. This means that every $1 of SEN should have more than $1 of collateral backing. The value of the collateral will fluctuate with changes in the market. Therefore, like most other DeFi lending protocols, Seneca uses liquidations to ensure that SEN remains overcollateralized.

Liquidation is the process that occurs when a position's collateral value is not enough to cover the position's borrowed amount. Each asset vault will have different liquidation thresholds that are defined by the Maximum Collateral Ratio. Once a Collateralized Debt Position (CDP) reaches that liquidation threshold, it becomes eligible for liquidation.

It is important to note that Seneca is an isolated lending protocol. This means that each CDP is treated independently. If a user has multiple CDPs, then each will have separate liquidation eligibility parameters, separate liquidation processes, and so on.

Definitions

Collateral Ratio: Calculated as SEN Borrowed / Value of Collateral. This is a representation of the current health of the loan. A low collateral ratio means that there is more collateral backing the SEN borrowed.

Maximum Collateral Ratio: This is a parameter that is set on a per-asset basis. Once a CDP’s collateral ratio exceeds the maximum collateral ratio, the position becomes eligible for liquidation.

Liquidation Fee: This is the bonus amount of collateral that a liquidator gets to keep for liquidating a CDP. This fee is compensation for risks that the liquidator may be taking (e.g., slippage, high gas fees, etc.). This fee is deducted directly from the borrower’s collateral.