Explain the liquidation mechanism of the lending platform in detail: how to avoid risks and improve capital efficiency?
A friend called and cried to me: he was having a great time borrowing money and mining. I was busy outside for three days, and I didn't open the platform to check, and found that I had been liquidated.
Due to the occurrence of this incident, I feel that it is very necessary to explain a problem that many people ignore and cause headaches in DeFi lending: the liquidation mechanism.
This article aims to answer the following questions:
- What is the mortgage rate?
- Is the maximum safe value safe?
- Why was it liquidated when I set the loan within the maximum safe value?
- How to reduce liquidation risk and improve capital utilization efficiency?
Mortgage rate and liquidation
The DeFi lending platform can be regarded as a bank. For example, mortgage a house to borrow from a bank. The appraised value is 10 million, and the actual loan (for example) is 6.5 million. After a few days, the house has fallen by 35%, and it is worth 6.5 million. Then this asset you If you don't make up the money, you can liquidate and sell it now-this is insolvency, bankruptcy liquidation.For the same reason, the DeFi lending platform is the same, and it is more clear. Take a lending platform on Heco as an example (code name C platform). C platform stipulates that the USDT mortgage rate is 80%, which means that if you deposit 10,000 USDT, you can borrow up to 8,000 USDT equivalent encrypted assets, such as 8,000 USD in BTC or 8,000 USDT or 8,000 HUSD.For different platforms, the mortgage rate may be different for different currencies. For example, on the L platform on Heco, the mortgage rate of USDT is 90% instead of 80%.Once the mortgage rate is exceeded, it may be liquidated.For example, if you deposit 10,000 USD and lend 8,000 USD in bitcoin, and then the bitcoin rises a bit, theoretically you should be liquidated. That is, insolvency.The relationship between mortgage rate and liquidation is yin and yang, triggering the maximum mortgage rate will be liquidated. The introduction of the L platform is as follows:Safe Maximum, Utilization, Risk Value
In the picture above, different platforms have different names, but the logic and meaning behind them are the same.Taking the C platform as an example, the USDT pledge rate is 80%, and the security maximum platform defaults to 80%. If you deposit 10,000 USDT, if you lend USDT or other encrypted assets (btc, eth, etc.) according to the security maximum value, it is 1 Ten thousand * 80% * 80% = 6400 US dollars.
Is safe maximum safe?
The answer is that some cases are very safe and some cases are very unsafe. Let's move on.If the deposit is a stable currency such as USDT, the loan is a stable currency (it can be usdt can be a stable currency such as HUSD, DAI, etc.). Due to the stable price, the fluctuation is often within 1%, and the maximum is 5%. Then, the maximum security value is of course very safe. In order to improve the efficiency of funds, you can even lend 90% of the "pledge rate". That is to say, in this case, if you deposit 10,000 US dollars and lend 9,000 US dollars, there is no problem.
For example, if you deposit 10,000 USD, if you borrow 6,400 USD of BTC according to the "safe maximum value", then the "safe maximum value" is also very unsafe. You only need to increase the price of 6,400 USD BTC to 8,000 USD, and your assets will be will be liquidated. Or conversely, if you deposited $10,000 in Bitcoin and loaned out $6,400 in USDT, if the BTC price drops to $6,400 ÷ 80% = $8,000, the Bitcoin worth $10,000 is now worth $8,000. Your assets will also be liquidated.In this case, it is recommended that the assets lent should not exceed 50% or 40% of the total assets. For example, if you have deposited usdt, BTC, ETH, etc., and the overall value is 10,000 US dollars, you can lend 4,000 US dollars of encrypted assets. Check it every day. It is not a big problem if the short-term value of the loaned assets doubles. Many people often only lend 30% of their assets in order to insure against this situation.
In this case, most of them are because they want to participate in loan mining. Depositing 1btc, the btc with the highest loan pledge rate is 0.8BTC. You said that the price of the two is the same. I can lend 100% of the assets that can be lent, which is 0.8BTC. Absolutely not. Still being liquidated. The reason is that the interest on lending is often higher than the interest on borrowing (excluding platform currency rewards for lending and mining). Soon, the loaned asset value is higher than the mortgage rate (80%) of the borrowed asset value, and liquidation begins.But if you are cautious and use the maximum security value (each platform is also set differently), or it is larger than the maximum security value, there is no problem. Take platform C as an example, if you deposit 1 BTC, the mortgage rate is 80%, and the maximum safe lending rate is 80%. At this time, you can lend 0.64 BTC without any problem, even if you lend more than the maximum safe value. For example, you can borrow 90% of all funds lent is 1BTC*80%*90%=0.72BTC. Not a big problem. Because it is the same currency, the logic is similar to the situation of "both borrowing and lending are stable coins".
Summarize
When using the lending platform, it is still necessary to calculate clearly. If the price fluctuations between borrowing and lending currencies are large, you need to adopt a cautious strategy. It is best to go to the platform frequently to check the ratios displayed in "risk value" and "used". At this time, " "Safe maximum value" is not safe, and the borrowing rate should be reduced; if the price fluctuations between borrowing and lending currencies are not large, such as single currency borrowing and lending or stable currency borrowing and lending, the so-called "safe maximum value" can be exceeded . For different situations, the basic logic of risk and capital utilization efficiency is these.
