Risk & Liquidations

Understanding risk is essential for using Floe safely. This guide explains how liquidation works and how to protect your positions.

How Liquidation Works

What Triggers Liquidation?

A loan becomes liquidatable when either condition is met:

1. LTV Breach: Current Loan LTV exceeds the liquidation LTV threshold

2. Overdue: Loan duration has expired and borrower hasn't repaid

The Liquidation Formula

Current LTV = (Principal × 10,000) ÷ Collateral Value (in USDC)

Liquidatable if:
  Current LTV > Liquidation LTV (from lender's maxLtvBps)
  OR
  Current Time > Loan Start Time + Duration

Example

Loan Details:
- Principal: 5,000 USDC
- Collateral: 2.5 ETH
- Liquidation LTV: 80%

At ETH = $4,000:
- Collateral Value = $10,000
- Current LTV = 5,000 / 10,000 = 50% ✅ Safe

At ETH = $3,200:
- Collateral Value = $8,000
- Current LTV = 5,000 / 8,000 = 62.5% ✅ Safe

At ETH = $2,600:
- Collateral Value = $6,500
- Current LTV = 5,000 / 6,500 = 77% ⚠️ Getting risky

At ETH = $2,400:
- Collateral Value = $6,000
- Current LTV = 5,000 / 6,000 = 83% 🔴 LIQUIDATABLE

Liquidation Process

Step 1: Detection

• Liquidation bots continuously monitor loan health

• When a loan becomes liquidatable, bots compete to liquidate it

Step 2: Execution

The liquidator calls liquidateLoan():

• Pays off the borrower's debt (principal + accrued interest)

• Receives the collateral + liquidation bonus

Step 3: Settlement

Solvent Liquidation (collateral > debt):

• Lender receives full repayment

• Liquidator receives collateral + 5% bonus

• Borrower loses collateral but debt is cleared

Underwater Liquidation (collateral < debt):

• Lender receives all collateral

• Bad debt is realized

• Borrower loses everything

Partial Liquidation

For solvent loans (where collateral value exceeds debt), liquidators can choose to partially liquidate. This means they repay only a portion of the outstanding debt and receive proportional collateral plus the 5% liquidation bonus on that portion. The borrower's remaining loan continues with reduced principal and collateral.

For underwater loans (where collateral value is less than debt), the loan must be fully liquidated — partial liquidation is not allowed.

Protection Mechanisms

For Borrowers

1. Buffer Your LTV

Don't borrow at maximum LTV. Leave room for collateral price drops.

Risk Level	Recommended LTV	Buffer
Conservative	40-50%	30-40% buffer
Moderate	50-60%	20-30% buffer
Aggressive	60-70%	10-20% buffer

2. Add Collateral Proactively

If collateral price drops:

1. Go to your loan in the Loans page

2. Click "Add Collateral"

3. Deposit more collateral to lower your LTV

3. Set External Price Alerts (coming soon on Floe)

Use external tools to monitor collateral price and get notified when approaching your liquidation price.

4. Repay Early

If you're worried about market conditions, repay your loan early. There's no prepayment penalty.

For Lenders

1. Set Appropriate Max LTV

• Lower Max LTV = more collateral buffer = safer

• Too low = fewer borrowers will match

• Recommended: 75-80%

2. Prefer Shorter Durations

Shorter loans = less time for prices to move against you.

3. Diversify

Don't put all your capital in one loan. Spread across multiple borrowers.

LTV Gap Requirement

Floe enforces a minimum 8% gap between:

• Origination Loan LTV: The LTV when the loan is created

• Liquidation LTV: The threshold where liquidation is allowed

This ensures borrowers have buffer room from day one.

Example:
- Lender sets Max LTV (Liquidation): 80%
- Borrower's origination LTV must be ≤ 72%
- Minimum 8% buffer at loan creation

Oracle System

Floe uses a robust dual-oracle system:

Primary: Chainlink

• Industry-standard price feeds

• High reliability and uptime

Fallback: Pyth Network

• Activates if Chainlink fails

• Provides redundancy

Circuit Breaker

Protects against oracle manipulation:

Trigger	Action
Price deviation > 15%	Operations paused
Stale price (> 1 hour)	Operations paused
L2 sequencer down	Operations paused
Invalid price (0)	Operations paused

When the circuit breaker is active:

• New matches blocked

• Repayments blocked

• Liquidations blocked

• Collateral operations blocked

Liquidation Economics

For Liquidators

• Receive 5% bonus on collateral liquidated

• Compete with other liquidators (first to execute wins bonus)

For Borrowers

• Lose all collateral

• Debt is cleared

• No further obligation

For Lenders

• Receive full repayment (if solvent)

• Receive collateral (if underwater)

Bad Debt Scenarios

In extreme cases where collateral value falls below debt:

Example:
- Principal: 5,000 USDC
- Interest owed: 100 USDC
- Total debt: 5,100 USDC
- Collateral: 2 ETH at $2,000 = $4,000

Liquidation outcome:
- Lender receives: 2 ETH ($4,000 value)
- Bad debt: 5,100 - 4,000 = $1,100
- Loss absorbed by lender

This is why overcollateralization and appropriate LTV limits are crucial.

Monitoring Tools

In-App Dashboard

• View current LTV in real-time

• See liquidation price

• One-click add collateral

Best Practices Summary

Borrowers

1. ✅ Maintain 20%+ buffer below liquidation LTV

2. ✅ Monitor prices during volatile markets

3. ✅ Add collateral proactively, not reactively

4. ✅ Repay before maturity to avoid overdue liquidation

5. ❌ Don't max out your borrowing capacity

Lenders

1. ✅ Set Max LTV based on your risk tolerance

2. ✅ Diversify across multiple loans

3. ✅ Prefer shorter durations in volatile markets

4. ✅ Understand that overcollateralization protects but doesn't eliminate risk

5. ❌ Don't lend more than you can afford to lose

FAQ

Q: Can I be partially liquidated? A: Yes. For solvent loans (where collateral value exceeds debt), liquidators can partially liquidate — repaying a portion of the debt and receiving proportional collateral. This reduces your position size rather than closing it entirely. Underwater loans (where collateral value is less than debt) must be fully liquidated.

Q: What if no liquidator executes my liquidation? A: Liquidation bots are incentivized by the 5% bonus. In practice, liquidatable loans are processed quickly.

Q: Can I stop a liquidation once it starts? A: No. Once the transaction is submitted, it cannot be stopped. Add collateral before reaching liquidation.

Q: What happens to excess collateral after liquidation? A: The liquidator receives all collateral. There's no return of excess to the borrower.