Avoiding liquidation risk
In essence, Account health is a proportion between your Borrow Limit(Borrow Capacity) and your Borrow Capacity Used.
where, for user u and asset a:
- CF is asset's Collateral Factor
- C is 1 for assets used as collateral, otherwise 0
- Deposit is amount of asset deposited
- Price is the equivalent asset's price in U.S. Dollars
- Borrow is amount of asset borrowed
- LT is Liquidation Threshold for the asset a.
It's a completely healthy situation to borrow the same asset as the collateral: Depositing amount D and borrowing amount B should effectively be seen as Deposit D-B, but only until Borrow starts exceeding Deposit. In this moment, a healthy account can become burned-out(with total negative saldo) and there's nothing liquidators can do about it.
To prevent that, an overlap_factor is introduced to smoothen the account health formula while still be tolerable with the same deposit-borrow asset:
Even if you don't interact with the protocol, your account health is subject to change:
- Your Deposit increased or decreased its value
- Your Borrows increased or decreased its value
- Interest on your deposits/borrows has been accounted.
- Your debt has been liquidated in order to increase your account health
Liquidators can liquidate part of your debt when your Account Health goes below 0%. This means, when your Account Health goes below 0%, a liquidator can step in and take up to 50% of your debt for one asset and the corresponding amount of your deposit + premium. The related parameters(Liquidation Threshold and Liquidation Penalty) are listed in "Asset Parameters" section.