Liquidation on Kava Mint and Lend
How liquidation works and how to avoid it
Kava Lend (formerly Hard) V2 launched on April 8th, 2021, and users can now borrow all assets on the platform (BTCB, BNB, XRPB, KAVA, HARD, USDX), making it a fully-functional DeFi lending platform.
Users need to understand how liquidation works to take steps to avoid having it occur. This article will discuss how liquidation occurs in both and how users can prevent it from occurring.
How liquidations work on Kava Mint
When a user opens a CDP on the Kava Mint, the amount of USDX they mint relative to the amount of the collateral they supply will determine a liquidation price.
For example:
A user locks 40 KAVA to mint 80 USDX, and the resulting liquidation price is 3.01 USD/KAVA (based on market conditions at the time of publication). If the user mints an additional 10.751862 USDX (by clicking “SAFE MAX”), the liquidation price increases from 3.01 to 3.41 USD/KAVA. If they borrowed an additional 20 USDX instead of the Safe Max amount, the liquidation price increases to 3.76 USD/KAVA.
Another way the liquidation price can rise is if a user withdraws some of their collateral without repaying any of the USDX loaned against it. Notice the difference in the change in liquidation price when a larger amount of collateral is withdrawn:
If there were a sudden drop in the price of the collateral, and it fell below the liquidation price, this could liquidate your assets. In that case, the assets are put up for auction. Auctions typically take between 8 and 24 hours, and users can expect 1/3 of their collateral returned to them, but this is not guaranteed. You can read more on auction specifics and how to participate here.
How to avoid liquidation on Kava Mint
Nobody wants their assets liquidated, so let’s discuss how to avoid it.
— Monitor the price of your collateral assets. “Set it and forget it” is not a recommended strategy, even if you take a conservative position and don’t maximize your borrowing.
— Adjust your CDP to lower the liquidation price. Users can do this in two ways:
- Lock more collateral.
2. Repay some of the borrowed USDX. As a reminder, you cannot have a loan balance of less than 10 USDX unless you repay it in full.
How liquidations work on Kava Lend
Since users can use multiple assets as collateral on Kava Lend, the process is more intricate but follows the same general logic. Each asset a user deposits as collateral is multiplied by a collateral factor (referred to as loan_to_value in the source code) to determine the maximum amount they can borrow.
For example, if a user deposits
— 1 BNB (at a price of $600 and collateral factor of 0.5)
— 10 KAVA (at a price of $6 and collateral factor of 0.5)
They would have a maximum borrow amount of
($600 * 0.5) + ($60 * 0.5) = $330
Imagine the user borrows 320 BUSD, and then the price of BNB drops to $500. They would now have a maximum borrow of:
(500 * 0.5) + (60 * 0.5) = $280
This position could now be liquidated because $320 is greater than $280. Any user can submit a transaction that liquidates a Lend borrow position, and they get 1% of the collateral as a reward.
If this position were liquidated, all supplied assets (1 BNB and 10 KAVA) would be auctioned off, attempting to raise $320 worth of BUSD. Any remaining collateral would be returned to the borrower.
How to avoid liquidation on Kava Lend
Avoiding liquidation on Kava Lend is fundamentally the same as avoiding CDP liquidation on Kava Mint.
- Actively manage the risk level of your borrow positions.
- Supply additional collateral.
- Repay some of the borrowed value.
- When borrowing an asset, the web app provides the option to implement a suggested limit of 60%.
If your supplied collateral is liquidated, it undergoes the same auction procedure as CDP debt auctions. The only difference is that while CDP auctions are bid on with USDX, Hard Borrow liquidations use the same denomination as the collateral.
Important Reminder
Kava upgrades to a new version of the blockchain several times a year. During these upgrades, users cannot make transactions on the platform for approximately 2 hours (typically between 13:00–15:00 UTC on the announced dates). Reducing the risk level of CDPs and Lend borrow positions by repaying some of the loans or locking additional collateral before this time is a common measure to protect against liquidation in the event of a major market shift during the upgrade.
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Disclaimer: This content is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors and may not under any circumstances be relied upon when making investment decisions.
