# Liquidations

The Lucia Protocol sets forth a robust Liquidation Mechanism to ensure the seamless operation of the lending ecosystem. This mechanism engages when borrowers fail to fulfill their debt obligations in a timely manner, as stipulated in the lending agreement.

**Terms of Agreement: Adherence to Loan-to-Value (LTV) Thresholds**

Borrowers are mandated to comply with the agreed Loan-to-Value (LTV) thresholds. Failure to do so results in the triggering of a liquidation process, managed by designated collateral liquidators. This process culminates in the full settlement of the outstanding debt.

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**Grace Period: Allotted Time for Loan Repayment**

For borrowers approaching the predetermined LTV threshold, the system provides a grace period of up to 12 hours to fulfill their loan repayment responsibilities. If the debt remains unsettled after 72 hours, the liquidation process is initiated.

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**Liquidation Event: Collateral Liquidators' Role**

Collateral liquidators are empowered to repay borrowers' loans before the LTV threshold is degraded to a critically low level of 0.0133%. These liquidators act to preserve the system's integrity and are remunerated with a reward for their services.

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The Liquidation Mechanism within the Lucia Protocol is carefully structured to ensure borrowers fulfill their debt obligations and to maintain the overall health of the lending ecosystem. It comprises a set of rules and actions, facilitated by collateral liquidators, to manage and settle default risks effectively.&#x20;

Example Scenario: A borrower's collateralization ratio drops from 80% to 79%.

| Field                       | Value |
| --------------------------- | ----- |
| Total Borrowed Amount       | $1000 |
| Total Collateralized Amount | $790  |
| Total Liquidatable Amount   | $13   |
| Liquidator’s Share          | $2.60 |
| Protocol’s Share            | $3.90 |
| Borrower’s Share            | $6.50 |

Liquidations are conducted both internally and by third-party entities.

When a loan is liquidated, it adversely affects the borrower's credit score, potentially complicating future credit requests. Furthermore, other penalties will be imposed:

* A negative impact on the borrower's credit reputation.
* The borrower's credit limit for future loans will be capped at $200.
* A higher repayment interest rate of 21% will be applied to borrowers with outstanding balances.

In cases where a borrower deliberately defaults, liquidation will be initiated.

A simplified formula for collateral liquidation is as follows:

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In this equation, *Collateral Amount* refers to the value of the provided collateral, where *Loan Amount* represents the borrowed sum. *Liquidation Threshold* signifies the minimum collateral ratio necessary to sustain the loan.