Liquidations

Liquidations are a critical component of the JSOHO Network, ensuring the stability and integrity of the lending and borrowing ecosystem. This section provides an in-depth look at the liquidation process, how it affects your assets, and strategies to avoid liquidation.

Introduction to Liquidations

What is Liquidation?

Liquidation refers to the process where an asset is sold off to cover outstanding debts when a borrower's collateral falls below a certain threshold. This mechanism ensures that lenders are protected and that the platform remains solvent.

Why Liquidations are Necessary

Liquidations help maintain the balance between supplied and borrowed assets, preventing default and ensuring that lenders receive their funds back. They act as a safety net to protect the financial stability of the JSOHO Network.

Liquidation Triggers

Collateralization Ratio

1. Definition: The collateralization ratio is the ratio of the value of collateral to the value of borrowed assets. It is a key factor in determining liquidation.

2. Threshold Levels: If the collateralization ratio falls below a predefined threshold, liquidation is triggered to protect the lender's interests.

Market Fluctuations

1. Price Volatility: Rapid changes in asset prices can affect the collateralization ratio. Significant price drops can trigger liquidation.

2. Liquidity Conditions: Low liquidity in the market can impact the speed and efficiency of the liquidation process.

Systemic Risks

1. Platform-Wide Events: Events affecting the overall platform, such as technical issues or security breaches, can influence liquidation thresholds.

2. Market Crashes: Extreme market conditions or crashes can lead to widespread liquidations across the platform.

The Liquidation Process

Monitoring and Detection

1. Automated Monitoring: The JSOHO Network uses automated systems to continuously monitor collateralization ratios and detect when they fall below the required thresholds.

2. Notification System: Borrowers receive notifications when their collateralization ratio approaches the liquidation threshold, giving them a chance to take corrective actions.

Liquidation Execution

1. Trigger Mechanism: Once the liquidation threshold is breached, the system triggers the liquidation process. The collateral is sold off or auctioned to cover the outstanding debt.

2. Auction Process: In some cases, the collateral may be auctioned to the highest bidder, ensuring that the debt is covered at the best possible price.

Impact on Borrowers

1. Loss of Collateral: Borrowers may lose part or all of their collateral depending on the extent of the liquidation.

2. Additional Costs: Liquidation may incur additional costs or fees that are deducted from the collateral value.

Preventing Liquidation

Managing Collateralization Ratio

1. Regular Monitoring: Regularly check your collateralization ratio and adjust your position to stay above the threshold.

2. Adding Collateral: Increase your collateral if you anticipate a drop in asset prices or increased borrowing.

Diversification

1. Asset Diversification: Spread your collateral across different assets to reduce risk and avoid liquidation due to fluctuations in a single asset's price.

2. Borrowing Strategy: Limit your borrowing to avoid excessive risk and maintain a healthy collateralization ratio.

Using Alerts and Notifications

1. Set Up Alerts: Enable notifications for changes in collateralization ratios to act quickly if you approach the liquidation threshold.

2. Regular Reviews: Periodically review your portfolio and collateral to ensure it remains within safe limits.