AF2.0 will provide us the ability to configure different liquidation methods for each collateral asset. To start, we will employ a double-layered liquidation system depending on the Debt Ratio (risk) of the positions. The two layers are:
Layer 1: Gentle Repurchasing through Close Factor with a fixed discount percentage
Repurchasing will be incentivized by offering up a borrower’s collateral to repurchasers at a percentage discount. This discount will start at 5% and can scale up to 10% with higher Debt Ratio, in order to make repurchasers prioritize riskier positions.
(Please note that 80% of the final discounted amount goes to buyback and burn of ALPACA, in order to make the platform anti-fragile even in downwards markets, and because up to half of the protocol revenue going to the ALPACA tokens in governance acts as a backstop in the Insurance Plan which covers the LYF positions).
A parameter called “Close Factor” will also determine the percentage of the debt position the liquidator will be able to repay in a single transaction. This means that only part of a position would be liquidated, just enough to get it back to health, which we refer to as Gentle Liquidation, or in this case, Gentle Repurchasing, which is a process that lowers the liquidation cost for borrowers.
This repurchasing layer will be the first layer that can trigger once liquidation is possible, because repurchasing is the cheapest option for the position holder. Should this layer not activate, the backup layer is described below.
Layer 2: Sell on DEXs
If the Debt Ratio of an account goes beyond a higher debt threshold (and no repurchaser has stepped in), there will be a backup function that will allow anyone to sell the position’s collateral on a DEX to pay back the debt and receive a certain % of the proceeds. This is similar to how the current liquidation method works now. We’ll share the exact parameters of these layers in the future.