Liquidation
What it means to be liquidated, the number that tells you how close you are, and what actually happens if the price moves against you.
When you borrow against collateral, the lending market needs to know the loan will still be covered if the collateral loses value. So it sets a limit: your debt may not exceed a set fraction of what your collateral is worth. Cross that limit and anybody may repay part of your debt in exchange for part of your collateral, at a discount. That is a liquidation, and it happens without warning and without asking you.
Nothing about this is unique to DeVOLT. It is how every lending market of this kind works, and it is the risk you take on in exchange for the leverage.
The numbers that describe where you are
- LLTV
- The limit set by the market: the fraction of your collateral value your debt may reach before liquidation is allowed. It is set by the market, not by DeVOLT, and it is on every row of the table.
- health factor
- How far you are from that limit, as a single number. Above one you are safe; at one you are at the boundary; below one you can be liquidated. It is your collateral value multiplied by the LLTV, divided by your debt.
- liquidation price
- The collateral price at which your health factor would reach the boundary. Easier to act on than a ratio, because it is a price you can watch.
- leverage
- How large your position is relative to your own money. Higher leverage means a smaller price move is enough to reach the boundary.
The health factor moves for reasons other than price. Your collateral usually earns yield, which pushes it up over time; interest accrues on your debt, which pulls it down. A position left alone does not stay still.
Why leverage and safety are the same dial
Higher leverage does not only multiply your return. It shrinks the price move you can survive, because your debt is larger relative to the same collateral. Every step up the slider buys return by spending room, and the panel shows both sides of that trade, the return and the health factor you would be opening at, before you sign.
What you can do about it
- add collateral
- Raises the health factor without changing the debt.
- reduce leverage
- Sells part of the collateral to repay part of the debt, in one transaction. The Managing a position chapter covers it.
- close
- Unwinds the whole position and returns what is left after the debt is repaid.
- set an alert
- Have DeVOLT watch the health factor and tell you before it gets close, rather than checking manually.
What DeVOLT does not do
DeVOLT does not liquidate you, cannot close your position for you, and will not act on your behalf if the price moves. It never holds your funds and never has permission to move them. That is the point of a non-custodial product, and it is also its limitation: nobody is watching the position for you unless you set an alert, and an alert is a message, not an intervention.