Liquidations

What is Health Factor?

Health factor is the numeric representation of the safety of a borrow position, calculated as: Total Collateral Value * Weighted Average Liquidation Threshold / Total Borrow Value

Liquidation Threshold is a parameter determined by Nexus Governance for each collateral asset, which is the maximum percentage of value that can be borrowed against a collateral asset. A health factor below 1 represents a borrow position that is eligible for liquidation. For example, if you supply $10,000 in ETH with an 80% threshold and borrow $6,000 in USDOX, your health factor = 10000 * 0.8 / 6000 = 1.333.

What happens when my health factor is reduced?

Depending on the value fluctuation of your supplies, the health factor will increase or decrease. If your health factor increases, it will improve your borrow position by making the liquidation threshold more unlikely to be reached. In the case that the value of your collateralised assets against the borrowed assets decreases, your health factor is also reduced, resulting in increased liquidation risk.

What are liquidations?

A liquidation is a process that occurs when a borrower's health factor goes below 1 because their collateral value does not properly cover their borrow value. This can happen when the collateral value decreases and /or when the borrow position value increases beyond the liquidation threshold of the collateral assets. In a liquidation, up to 50% of a borrower's debt is repaid and that value + the liquidation fee is taken from the collateral available, so after a liquidation that amount liquidated from your borrow position is repaid. Liquidations are a permissionless feature of the Nexus Protocol. If a borrow position has insufficient collateral to cover the liquidation threshold, then any address on the network is able to initiate a liquidation transaction.

How much is the liquidation penalty?

The liquidation penalty (or bonus for liquidators) depends on the asset used as collateral. You can find every asset's liquidation fee in the risk parameters dashboard.

Can you give me an example?

Example 1

Bob supplies 10 ETH and borrows 5 ETH worth of USDOX. If Bob’s Health Factor drops below 1 his borrow position will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of USDOX. In return, the liquidator can claim a single collateral which is ETH (5% bonus).

The liquidator claims 2.5 + 0.125 ETH for repaying 2.5 ETH worth of USDOX.

Example 2

Bob supplies 5 ETH and 4 ETH worth of ZBU, and borrows 5 ETH worth of USDOX. If Bob’s Health Factor drops below 1 his borrow position will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of USDOX. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for ZBU (15%) than ETH (5%) the liquidator chooses to claim ZBU.

The liquidator claims 2.5 + 0.375 ETH worth of ZBU for repaying 2.5 ETH worth of USDOX.

What is a good health factor?

Health Factor represents the ratio of collateral to borrow value. There is not an exact answer as to what constitutes a "safe" health factor as it depends on the volatility and correlation of collateral and borrow asset prices.

Each collateral and borrow asset has a corresponding oracle that reports the price of the token with respect to a base currency (typically USD). In general, if the collateral and borrow assets are highly correlated with respect to the base currency (such as supplying and borrowing only stablecoins or ETH-correlated assets), a lower health factor can be considered safe compared to a position where assets are not correlated.

Simulation tools can be used to estimate the effects of price movements and accrued interest on health factor.

How can I avoid getting liquidated?

To avoid liquidation you can raise your health factor by supplying more collateral assets or repaying part of your borrow position. By default, repayments increase your health factor more than supplies. Also, it's important to monitor your health factor and keep it high to avoid a liquidation. Keeping your health factor over 2, for example, gives you more of a margin to avoid a liquidation. Tools that can help you with this:

• You can simulate Health Factor movements using DeFi Simulator.

You should be mindful of stablecoin price fluctuations due to market conditions and how it might affect your Health Factor. For example, the market price of USDC 1.00 might not equal exactly USD 1.00, but USD 0.95, for example. The price fluctuations of stablecoins, like any assets, affects your Health Factor.