Liquidations
A liquidation is the recovery of a borrower's collateral by a third party who repays part or all of the outstanding debt. Whether a position can be liquidated depends on its LTV, the ratio of debt to collateral value: each market has a fixed, immutable Liquidation LTV (LLTV) above which the position becomes eligible for liquidation.
On Tenor, a borrow position can be liquidated in two ways:
- LTV-based liquidation: when the position's LTV ratio rises above the market's LLTV.
- Post-maturity liquidation: when the position reaches maturity without being repaid or renewed, even if its LTV is still below the LLTV.
Liquidations are triggered by third-party liquidators, who repay the borrower's debt in exchange for the collateral at a discount relative to its oracle price. This discount is defined by the market's liquidation bonus parameter, which is typically set as a ratio of the LLTV.
Set notifications on Tenor to receive alerts when a position's health deteriorates, leaving time to act before liquidation becomes possible.
LTV-based liquidation
The LLTV sets the maximum ratio of debt to collateral value that a position is allowed to reach. Once a position's LTV rises above the LLTV, it is eligible for liquidation.
LTV rises when the value of the collateral falls relative to the debt. On Morpho Midnight, debt is valued at par (the amount owed at maturity) when computing health, so LTV moves with collateral price, not with the passage of time. A borrower can reduce their LTV by adding collateral or repaying part of the debt.
Example
Consider a situation where:
- A borrower deposits 1 cbBTC as collateral (valued at $80,000 with BTC at $80,000).
- The market LLTV is 86%.
- The borrower borrows $64,000 USDC.
The LTV is calculated as:
As the price of cbBTC falls, the collateral value drops and the LTV rises:
| cbBTC price | Collateral value | LTV | Status |
|---|---|---|---|
| $80,000 | $80,000 | 80.0% | Healthy |
| $76,000 | $76,000 | 84.2% | Healthy |
| $74,000 | $74,000 | 86.5% | Eligible for liquidation |
Once LTV exceeds the 86% LLTV, the position is eligible for liquidation.
If a position is liquidated
When a position is liquidated, the liquidator repays part of the outstanding debt and seizes collateral worth the repaid amount plus the liquidation bonus, valued at the oracle price. The bonus compensates the liquidator for taking on the position and is deducted from the borrower's remaining collateral.
Before maturity, liquidations are typically partial: they bring the position's LTV back down to the LLTV rather than below it, so the bonus is sized to the actual breach rather than the whole position. The borrower keeps any collateral that is not seized, along with the borrowed funds that were already disbursed.
If the borrower's collateral, valued at the oracle price, cannot cover the outstanding debt even when the maximum liquidation bonus is applied, the unrecoverable portion is realized as bad debt. That shortfall is socialized across all lenders in the market: each lender's positions in the market are slashed proportionally at their next interaction.
Post-maturity liquidations
A position that reaches maturity without being repaid or renewed is eligible for liquidation, regardless of its LTV. At that point, a portion of the collateral equal to the outstanding debt is sold to fully settle the position.
Post-maturity liquidation applies even when a borrower's LTV is well below the LLTV. Enabling auto-renewal renews the position automatically before maturity.
Delayed liquidations
Some markets use delayed liquidations. On these markets, a position that first becomes liquidatable enters a grace period before any liquidator can act, followed by a liquidation period during which liquidators can act. The grace and liquidation periods are fixed for each market and begin only once the grace period is started.
See Delayed Liquidations for the OTC use case and DelayedLiquidationGate for the contract details.