Liquidator Role
Liquidations are essential for maintaining the solvency of Lending Markets. For Twyne, they play an even more critical role, as the protocol must maximally protect the CLP’s collateral from unwanted liquidations in the underlying Lending Market (e.g., Aave). To protect CLPs’ collateral, Twyne prioritizes executing liquidations prior to them taking place elsewhere. Furthermore, given the higher loan-to-value ratios involved, Twyne cannot depend on just-in-time swaps or worry about Borrower UX when liquidations occur. As such, when a Borrower is liable for liquidations, their entire position is lost. This is equivalent to a 100% closing factor and liquidation incentive equivalent to whatever surplus position the Borrower owns.
That said, a liquidation may still not happen in time on Twyne, thus triggering a liquidation on the underlying Lending Market. As such, in Twyne we consider two liquidation avenues (A & B).
Avenue A: Liquidations via inheritance
On Twyne, any user (whether Borrower or CLP) should be allowed to earn liquidation proceeds. We do this by allowing willing users to signal for inheriting a share of the liquidated Borrower’s position. They do so by having spare collateral that can be used to boost the collateralization of the liquidated Borrower’s position.
When a position is inherited, the user inherits the liquidated Borrower’s collateral, liabilities, and active interest payments for any CLP funds currently in use. It is then up to them to decide whether they wish to wind down the inherited position wholly, partially, or not at all.
EXAMPLE
Imagine that:
- Alice is a CLP with (X) ETH of unused collateral.
- Bob is a Borrower with (Y) ETH of his own collateral
- Bob currently has an outstanding loan of (Z) USDC from an underlying Lending Market.
- Bob is supporting his outstanding loan by paying a yield for Alice’s (X) ETH.
At some point in the future, due to ETH price depreciation, Bob becomes liquidatable.
Charlie (a liquidator) signals interest to inheriting Bob’s position using K ETH of her own collateral. The liquidation triggers through inheritance leaving Charlie with:
- (K+Y) ETH of collateral
- An outstanding loan of (Z) USDC
- Continued yield payments for Alice’s (X) ETH
After the liquidation, Bob doesn’t own anything anymore. Alice still owns her X ETH (plus any accrued interest). Charlie is now a new borrower managing a position involving (Y + K) ETH of collateral, the external liability of Z USDC, and the upkeep of interest for Alice’s X ETH of extra borrowing power.
Avenue B: Accounted Liquidation
If no user signals willingness for inheriting the position, it may happen that the position worsens to the point where it becomes liable for liquidation on the underlying Lending Market. Whereas the result of such a liquidation cannot be predicted deterministically, we can generally assume that, upon settling, the Borrower + CLP position will be left with some amount of collateral (C) and some amount of outstanding loan (B). The position remains nominally under the ownership of the liquidated Borrower (i.e. they are still liable for the outstanding loan) but their collateral (C_{\text{Borrower}}) and the CLP’s collateral (C_{\text{CLP}}) will be defined such that the Borrower’s loan-to-value (LTV) ratio is set to Twyne’s liquidation LTV (\lambda_{\text{liq}}):
\[C_{\text{Borrower}} = \frac{B}{\lambda_{\text{liq}}}\] \[C_{\text{CLP}} = C - C_{\text{Borrower}}\]Depending on the assets involved, the liquidation LTV triggers on Twyne, and how the liquidation gets executed by the underlying Lending Market, an avenue B liquidation may or may not create losses for teh CLP’s funds. These are, after all, the risks taken for earning the yields perceived by CLPs.