As soon as we deposit some assets (tokens) on the Venus protocol, we are entitled to receive interest (in deposited currency plus rewards paid in XVS). The Venus protocol provides us with other options, in addition to interest on our tokens, we can take a loan using our asset as collateral for this loan.
How much can I borrow?
For each token in the Venus protocol, there is a “collateral factor”, this indicates the maximum amount we can borrow against our collateral for that particular token.
For our example, we will use the DOT token, which has a collateral factor of 60%. So the MAXIMUM amount we can borrow is 60% of the USD value of our collateral deposited on the Venus protocol. We call this value the ‘‘Borrow limit’’. The borrow limit is displayed in the “dashboard” section of App.venus.io as a bar that shows the percentage of our loan limit used. This indicator ranges from 0% to 100% (in terms of the value of our pledge in USD, it represents 0% to 60% of the value of our pledge). To make it clear, 100% of the used borrow limit represents 60% of the value of our collateral. We should never let the loan limit reach 100%, because at that point, we can be liquidated.
Clarification: To date 08/15/2022, all tokens have a collateral factor between 40-80%, this may of course change in future proposals.
SO WHAT DOES IT MEAN ,’‘TO BE LIQUIDATED’’?
If our position is liquidated, this means that we allow the liquidator to pay our loan and give him the right to take over our provided collateral equal to the amount paid by the liquidator + 10% of this amount, which remains as profit.
What is the maximum liquidation amount?
The liquidator liquidates our position enough to pay off our loan, a maximum of 50% of the value of the loan, which is immediately taken in the form of our delivered asset plus an additional 10% as a liquidation fee (ie profit for the liquidator).
Can I be a liquidator too?
Yes, anyone can be a liquidator. You need to know how to communicate with the function corresponding to the vToken smart contract, find the person in the liquidation position, you need to have BNB to pay the GAS fee and assets to pay off the loan. Bots that do such liquidations automatically are often programmed to do it in seconds, so it will often be very difficult (you can try) to do the liquidations manually, while not impossible.
So what is my real loss?
When you are liquidated, technically your only loss is the 10% fee to the liquidator (now 5% to the liquidator and 5% as protocol profit).
We will show everything in detail using an example:
I deposited $100 worth of DOT and borrowed $60 in BNB.
So how does it proceed afterwards…
1) Borrow: $100 collateral, $60 debt, $60 (borrowed) in my wallet
- so we deposited $100 and borrowed $60 - our debt is the $60 we have in our wallet
2) Liquidation: $67 collateral, $30 debt, $60 in my wallet
- during the liquidation process, the liquidator paid us half of our debt ($30) and in return received $33 from our collateral ($30+3 fee)
3) Repay of loan: $67 collateral, $0 debt, $30 in my wallet
- we used $30 from our wallet to pay off the debt
4) Redeem: $0 collateral, $0 debt, $97 in my wallet
- at the moment when we withdrew our pledge back to the wallet, we had $97 left there, so our real loss after one liquidation process is $3 = 3% of our total pledge
BUT BEWARE! The trick is that the liquidators can liquidate you again and again until your loan is ‚‘‘healthy’’, so if you are still over the maximum borrow limit after the first liquidation, you will be liquidated again.
Borrowing $60 would mean using up my maximum borrow limit for me, so I could be liquidated immediately. If you will work with loans, it is necessary to always borrow less in order not to reach the point of liquidation.
How do I get to the liquidation point?
- Change in the value of the asset we supply:
If this value goes down, the risk of liquidation increases because we have a lower current USD value as collateral for our loan, the percentage of the borrow limit increases, we are closer to the point of liquidation. Conversely, if the value of our collateral increases, the liquidation risk decreases.
In the example, we use DOT as collateral, so if the price of DOT falls, the risk of liquidation increases, if the price of DOT increases, the risk of liquidation decreases.
- Change in the value of the asset we borrow:
For example, if we borrow BNB and the price of BNB rises, the value of our loan in USD will also start to rise. Of course, this also brings us closer to using the maximum borrow limit, and the risk of liquidation increases. On the contrary, if the price of BNB falls, the amount of our loan in USD will also fall, as will the risk of liquidation.
If you use a volatile asset as collateral and also borrow it, you must carefully monitor your account, in case of significant market movements and react to them by adjusting the amount of the loan, etc. On the contrary, if the asset of collateral and of the loan are the same, the risk of liquidation in this case is almost zero. because the amount of your pledge and the loan in USD changes at the same time.
Our credit limit is also slowly changed by the variable interest we earn on our collateral as interest in the same token we supplied to the protocol. Of course, it is the same with the loan, where this variable interest is in turn added to our loan (so it increases it very slowly).
Finally, let’s clarify a few terms:
Supply: Value in USD that we deposit
Borrow: Value in USD that we borrow
Liquidation point: Value in USD that our collateral has to fall to put us in a liquidation position.
Supply x 0.6 (60% collateral factor for DOT) = Maximum amount to borrow = Liquidation Point