> For the complete documentation index, see [llms.txt](https://lucia-protocol.gitbook.io/lucia-protocol/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://lucia-protocol.gitbook.io/lucia-protocol/liquidations.md).
# 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.
**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.
**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.
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.
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:
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.
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