Taking on a leveraged position as a yield farmer comes with increased opportunity, but also increased risk. One of these significant risks is that of liquidation. When taking on a leveraged position, this position is monitored by a debt ratio. This is measured as the amount of debt taken on by a user at entry by the value of the position at present.
An example of this would be someone taking out a position under the following conditions:
Collateral: 10 BNB
Starting Leverage: x 2
This would make the debt size 20BNB
This would make the position size 30BNB
This would make the debt ratio 20/30 = 66.66%
For ease of explaining lets just say BNB - 11CAKEBNB is 1:1 (this isn't the case in reality).
Each position, based on a variety of factors, including the volatility of the underlying assets and leverage of the position has what is called a ‘Death Leverage’ this is a the point of leverage, that if a position were to meet or go past the position would be susceptible to liquidation. Let’s say the 'Death Leverage’ for the 11CAKEBNB position above is 4.50.
Now lets imagine the price of 11CAKEBNB drops by 10%. This would make the debt ratio:
(Debt) / (Position Value) = 20 / 27 = 74.07%.
To calculate the current leverage of this position:
11CAKEBNBborrowed / (11CAKEBNBtotal - 11CAKEBNBdebt)
20 / (27-20) = 2.857
This current leverage remains below that of the death leverage and is still safe from liquidation. But as it has increased and is at more risk, and it would be wise to monitor the position. At this (or any point in the process) the leveraged yield farmer can manage their position in a variety of ways, including:
Withdrawing from this position - At this point the user could close their position. If they were to do this, the first thing the platform would do is repay the debt position (20BNB) to the Bigfoot Bank. The remaining 7 BNB would then be returned to the yield farmer.
Adding more collateral - At this point the user could also add additional collateral to their position to improve their debt ratio. They could do this by depositing additional 11TOKENS from the vault or by adding more BNB collateral. The more they add, the lower their Debt Ratio and Current Leverage Position will become, reducing their liquidation risk.
To further explore this example, lets say the price of 11CAKEBNB drops 20% from the entry price. This would make the debt ratio:
(Debt) / (Position Value) = 20 / 24 = 83.33%.
Current leverage in this position = 11CAKEBNBborrowed / (11CAKEBNBtotal - 11CAKEBNBdebt)
20 / (24-20) = 5
This is now above the Death Ratio number and the position is at risk of being liquidated.
How liquidation occurs
The ‘All Positions’ tab of the Bigfoot platform allows anyone to monitor current leveraged yield farming positions and their respective debt ratios. If any of these debt ratios exceed the ‘kill ratio’ for that pool the liquidate function can be called by anyone.
If Current Leverage > Death Leverage" Liquidate" function could be called
Using the example above, where the 11CAKEBNB Current Leverage is above that of the "Death Leverage", the liquidation function can be called by anyone. In calling this function the first priority and action that occurs is that the debt position is repaid. In the case above, with a debt position of 20BNB outstanding in the total position size is 24BNB. There is 20BNB Debt to be repaid to the Bigfoot Bank. After this occurs there is 4BNB outstanding. Following this the caller of the liquidation function is entitled to a reward of 1% of the position value - in this case it would be 0.24 BNB. Following this the remaining amount is returned to the yield farmer (3.76 BNB in this case).
** Please note in the example above, and in any borrowing position, the position value is subject to the interest rate. This would reduce the position value at current rate for the platform, updated on a per second basis. This would be factored into the above calculations **
Last modified 6mo ago
Copy link