Warden Finance Docs
AppBlog
  • Moonwell Risk Methodology
    • Risk Vectors
      • Volatility Risk
      • Liquidity Risk
      • Oracle Risk
    • Governance Parameters
      • Interest Rate Model
      • Liquidation Incentive
      • Collateral Factor
      • Close Factor
      • Borrow Cap
    • Methodology
    • Tooling
  • Proposal Diff Reports
    • Sonne SIP-08 Diff Report
    • Moonwell MIP-B08 Proposal Diff Report
    • Moonwell MIP-B09 Proposal Diff Report
    • Moonwell MIP-M09 Proposal Diff Report
    • Moonwell MIP-B10 Proposal Diff Report
Powered by GitBook
On this page
  • Utility
  • Methodology

Was this helpful?

  1. Moonwell Risk Methodology
  2. Governance Parameters

Liquidation Incentive

Breakdown of Liquidation Incentive parameter utility and methodology

PreviousInterest Rate ModelNextCollateral Factor

Last updated 2 years ago

Was this helpful?

Utility

The liquidation incentive parameter determines the amount of additional collateral given to liquidators as an incentive to perform liquidations and keep the protocol solvent.

The liquidation incentive is equivalent to 10% of an underwater accounts' outstanding borrow, of which 30% returns to the protocol reserves.

The parameter is set globally for the protocol. In other words, all markets bear the same liquidation incentive setting.

In order for a liquidation to be profitable for a liquidator, the incentive must cover for the following liquidation costs:

  • Oracle vs market price skew for both collateral and debt currency

  • Slippage to sell the collateral currency and buy the debt currency.

  • Gas fees (swaps + liquidation)

Methodology

In order to validate the robustness of the liquidation incentive our methodology relies on backtesting the profitability of simulated liquidations given historical market conditions.

More specifically, we backtest the block per block profitability of liquidating a given amount of a collateral asset. Our backtesting simulation will look at historical oracle price skews, slippage, and gas costs.

Based on our backtesting simulation, we will assess the longest time it would have taken for a liquidator to profitably execute a liquidation of a given trade size. This worst time to liquidation metric will allow us to measure the robustness of liquidation discounts.

The liquidation discount should be set to a level that, given the worst historical downturn events, would have allowed a position of a determined worst case size to be liquidated profitably within a specified time limit.