Liquidating
Last updated
Last updated
Liquidation ensures that there is always sufficient collateral to cover all PAR/paUSD tokens. Vaults below a specified health factor are subject to liquidation by profit-seeking actors in the network. Network actors have a financial incentive to trigger liquidations as fast as possible. This has the positive effect of removing risky vaults from the system.
A liquidation fee is charged to the borrower during liquidation, added to the outstanding debt.
All vaults in the Parallel Protocol are covered by the Insurance Fund. The Insurance Fund comes into use when a vault that faces liquidation does not have enough collateral to pay for the entire outstanding debt.
Potential bad debt are covered by the Insurance Fund. Learn more about it here.
The Insurance Fund will cover the difference in those cases. Liquidation will simply fail if the safety reserve can not cover it. Once enough fees have been collected, liquidation can proceed. During this time, the safety reserve will take on the volatility risk of the collateral.
