AUSD Liquidation

Liquidation is the process of selling collateralized assets to repay the outstanding AUSD borrowed by a position, effectively closing the position. Liquidation can occur when a position's collateral value falls too low, such that the position's Safety Buffer reaches 0 (which is a point where the risk of creating bad debt is too high if the position isn't closed). The mechanism of Liquidation ensures that AUSD is always fully-backed and overcollateralized. 
AUSD's uses gentle liquidation. This limits the max liquidation size to the Close Factor, which is currently set to 25% of a position's Debt Value. This reduces the associated costs and liquidation risk for AUSD borrowers, while still preventing the risk of bad debt.
Liquidation Methodology
AUSD implements a liquidation methodology called Fixed Spread Liquidation (FSL), which is adopted by leading protocols such as AAVE and Compound. Fixed Spread Liquidation ensures that liquidation is executed in a timely manner when the value of a position’s collateral falls below its determined safe threshold. FSL works by incentivizing liquidators with extra collateral on top of the amount of AUSD paid back by them when they liquidate a position (the liquidation incentive).
How Liquidation is Executed
Liquidation can be executed when the value of a position’s collateral falls below the safe threshold (i.e. collateral factor).
To understand how liquidation is executed, you must first familiarize yourself with the following terms and parameters: 
1.Locked Collateral: This is the collateral that a user puts up in order to borrow AUSD. 
2.Collateral Factor (LTV): This is the parameter that determines how much AUSD can be borrowed based on the value of the collateral, where value of Locked Collateral * Collateral Factor = Borrowable AUSD. This parameter also acts as the liquidation threshold, as a position will be subject to liquidation if its debt ratio reaches the Collateral Factor. 
3.Borrowable AUSD: This is the maximum amount of AUSD that can be borrowed as determined by the Collateral Factor and the value of the Locked Collateral
4.Position Debt: This is the amount of AUSD that is being actively borrowed. When a user opens an AUSD position, the Position Debt will never be higher than the borrowable AUSD. If the Position Debt becomes equal to the borrowable AUSD, the position can be subject to liquidation.
5.Liquidation Price: This is the price the collateralized asset can drop to at which point the position could be subject to liquidation. The liquidation price is calculated by the following formula: Liquidation Price = Position Debt Value/(Collateral Factor * Collateral Quantity), where Position Debt is AUSD borrowed, and Collateral Quantity is the number of units of Locked Collateral.
6.Shortfall: This is the difference between a position's Debt Value and the Borrowable Limit, and occurs when a position's Debt Value is higher than the Borrowable Limit. When there is a Shortfall (i.e. Position's Debt Value - Borrowable Limit ≥ 0), the position has overextended itself and must be liquidated to prevent bad debt. (However, since AUSD is overcollateralized, there is still a conservative buffer between when Shortfall reaches 0 and the point at which bad debt could occur)
7.Close Factor: This is the maximum amount of collateral that could be liquidated in a position. The Close Factor is currently set at 25%, which means that up to 25% of the collateral could be liquidated by the liquidator if the collateral value falls below the threshold. This reduces the associated costs and liquidation risk for AUSD borrowers, while still preventing the risk of bad debt.
8.Liquidation Incentive: This is the incentive bonus paid in the form of the position’s collateral to the liquidators to incentivize them to maintain the health of AUSD positions. It is currently set at 1% of the liquidation balance, which is the value of the debt paid at liquidation. (The Liquidation Bounty is 5%. Of that, the Liquidation Incentive that goes to the liquidator is 1%, and 4% goes to $ALPACA buyback & burn)
To illustrate how liquidation is executed, let’s take a look at the example of Alice below:
On the 1st of December, Alice put up 1 ibETH as collateral to mint 1,800 AUSD. Below are the parameters of Alice’s AUSD position: 
Locked Collateral: 1 ibETH (Assume 1 ibETH = 3,000 USD) 
Collateral Factor (or Maximum Debt Ratio): 75% 
AUSD Borrow Limit: 2,250 AUSD (3,000 *75%) 
Position Debt: 1,800 AUSD (Alice borrowed 1,800 AUSD) 
Liquidation Price: 2,400 USD
On the 1st of January, the value of ibETH dropped to 2,300 USD. Alice’s collateral value dropped below the threshold, which led to the following values for her position parameters: 
Locked Collateral: 1 ibETH (1 ibETH = 2,300 USD) 
Collateral Factor (or Maximum Debt Ratio): 75% 
AUSD Borrow Limit: 1,725 AUSD (2,300 *75%) 
Position Debt: 1,800 AUSD
Shortfall: 75 (1,800 - 1,725) 
Liquidation Price: 2,400 USD (which is now higher than current price of 2,300 USD)
Since the price of ibETH (2,300 USD) dropped below liquidation price (2,400 USD), Alice’s position became subject to liquidation, leading the liquidator to perform full liquidation: 
Close Factor: 25% 
Repayable Debt: 450 AUSD (1,800 * 25%) 
Liquidator to repay: 450 AUSD 
Liquidation Incentive: 5% 
Collateral to be given to liquidator: 0.205 ibETH ((450 * 1.05) / 2300) 
Remaining Locked Collateral: 0.795 ibETH (1 ibETH - 0.205 ibETH) 
Remaining Position Debt: 1350 AUSD (1,800 of initial AUSD minted - 450 AUSD paid by the Liquidator) 
Mintable AUSD: 1,371.37 AUSD (0.795 ibETH * 2,300 * 75%) 
Shortfall: No Shortfall (1,371.37 - 1350 ≥ 0)
Please note that for simplicity of illustration, we’ve ignored the accumulated yields from the Lending APR and Staking APR earned from the position's collateral, as well as the Stability Fee, both of which continuously accrue on positions that are actively borrowing AUSD.
Multi-Layered Price Oracle Protection
We will use two oracle price feeds - Chainlink and Band Protocol. Chainlink will be used as a main price source and Band as a secondary source. If the price difference between the two sources becomes more than 5%, we will pause interactions with the contract, stopping liquidations until the oracle prices realign (similar to how Alpaca Guard works).
Time delay
We have also implemented a time delay on the collateral price oracle for AUSD. The implementation is similar to MakerDAO's implementation of delaying the price feed. The current time delay is set to 15 minutes, and will apply to all collateral assets.
This time delay will help prevent on-chain price manipulation and flash liquidations, as well as give users enough time to manage their positions (close, add collateral, etc.) in the case of sharp price movements on collateral assets.

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Liquidation Methodology

How Liquidation is Executed

Multi-Layered Price Oracle Protection