New Liquidation Mechanism Integration
Enabling Investor Protection
We are happy to announce that the new liquidation mechanism for EasyFi’s protocol has been integrated and tested successfully. A brand new dashboard for liquidations has been set up to make it more convenient and transparent to users. We are now almost ready with the launch of V1 (version 1) EasyFi contracts (currently live version is V0) to go live for final testing and subsequent mainnet release.
Although all required information to find under collateralized or under-water loans can be obtained from the blockchain. The primary reason for setting up a dedicated dashboard is to make the necessary information available in a timely and structured manner. Thereby making it convenient for liquidators, institutional or retail, to perform liquidations. We understand that users may want to deploy bots to get first-hand info if any bad loan surfaces and calls for a liquidation, besides using the dashboard on the EasyFi app; we will hence be providing the APIs for this purpose in due course.
The process of liquidation will entail incentivization for liquidators translated to discounts on the assets in the accounts that are up for liquidation. This mechanism requires some agile risk management strategies that can be deployed to respective money markets which already have been discussed in previous posts.
We will share detailed information pertaining to measuring account health, discount on performing liquidation, collateral factor, close factor against respective money market during launch, and necessary changes from time to time.
Here’s a roundup on how liquidations work:
Liquidation in traditional markets VS DeFi
In traditional financial liquidation scenarios related to collateral-based borrowings, a failed performance of goods, assets, businesses, etc, results in insolvency proceedings through the sale and distribution of the remaining assets to its claimants. This is based on the priority of various parties’ claims and usually happens with drastic discounts provided on the remaining assets. Liquidation proceedings happen with the appointment of a trusted (centralized) liquidator who oversees the whole process; who is also responsible to identify the type of creditors (secured / unsecured) and then take a call.
In the case of lending & borrowings in a DeFi protocol, the importance of liquidation is paramount because here we work without a centralized liquidator and only use algorithm-based smart contracts to determine the health of a borrower and proceed with liquidation if the need arises.
EasyFi’s Liquidation — the ideation
The crux of being decentralized in the truest sense on our lending protocol would mean that we must not be relying on a centralized liquidation mechanism or a designated central authority to perform liquidation on bad borrowings.
So this essentially meant that we had to develop a mechanism that allows a system for multiple liquidators who can not only perform liquidation but also be able to identify such opportunities on liquidatable assets and borrowings in real-time.
When we go about the volatile assets market on a DeFi lending protocol, it is vital to keep track of the account health i.e. the sum total of an account that is supplying assets, borrowing assets, and collateral factor between them at any given point in time. This is true for every asset in the market. Any account that exceeds its borrowing allowance due to a fluctuation in the asset’s market price, can lead to under-collateralized borrowings.
We understand the pain with over-collateralization and higher cost of loans therefore we started with a layer 2 network and our focus is now on providing under-collateralized loans to our users. There has already been good progress in this direction and we have started working on an identity layer for better borrower’s evaluation mechanisms. We’ll keep our community members updated in this regard too.
Here’s the first look at the liquidation dashboard for our users. A detailed tutorial shall be released to cover all aspects too.
To learn more about $EASY and EasyFi, please go through our whitepaper and other articles on this publication.