How to avoid Forced Liquidation?

What is Forced Liquidation?

Forced Liquidation — occurs if the price of bitcoin fluctuates enough to make the LTV ratio rise higher than 90%, and there have been no attempts from the Borrower to either increase the amount of Collateral or partially repay the debt in order to keep the LTV ratio at the required level.

The Borrower will receive 3 margin call notifications prior to a Forced Liquidation. What is margin calling? A margin call occurs when the value of the Collateral falls below the value the Contract requires.

In case the Borrower has not responded, and the LTV ratio has risen higher than 90% — both the Lender and the Borrower will be informed about the start of a Forced Liquidation procedure. In this case, the Contract will be terminated and the Collateral will be transferred to the Lender.

Forced Liquidation can also occur if the Borrower failed to repay the debt. In this case, after the Contract period has ended, and there have been no attempts from the Borrower to repay the debt within 24 hours, Forced Liquidation occurs.

Important things to remember about forced liquidation

For Lenders:

Even if Forced Liquidation occurs, there is no risk of not receiving your interest, since all loans are over collateralized.

Also note, that in case the contract has been liquidated, you will receive the debt (loan amount + interest) in bitcoin. So, if you are afraid of bitcoin’s volatility, and a Forced Liquidation occurs, you should monitor the price of bitcoin, and be prepared to convert bitcoin into stablecoins in a timely manner.

For Borrowers:

In case Forced Liquidation occurs, there will be an additional cost — a Forced Liquidation fee of 5%.

In case the amount locked in the multisig escrow address is greater than the outstanding debt — the difference will be refunded to you.

Some tips that will help you avoid Forced Liquidation

1. Set a low LTV ratio

What is the LTV ratio? The LTV ratio shows the relation between the Loan amount and the value of the Collateral. And in case the value of the Collateral goes down — the LTV ratio goes up, and additional Collateral will be required to balance this ratio.

In general, a higher LTV ratio entails a higher risk of contract liquidation. Thus, lower LTV ratio = more collateral.

2. Send more BTC to escrow

Even if you are entering into a contract with 70% LTV you can always protect yourself by purposely sending more collateral to escrow. In this case, even if the price of bitcoin goes down, you will have more time to react.

3. Monitor the exchange rate

Keep an eye on the exchange rate, if bitcoin’s price is going down, remember to log into your Hodl Hodl account and check the current LTV ratios of your ongoing contracts.

4. Use a valid email address

When creating an account, sign up with a valid email address, since all of your notifications about your contract statuses and updates will be sent there.

5. Repay the debt on time or even earlier

Do not wait until the last moment, remember you can always complete your contract by early repayment.

6. React if you receive a Margin call

Increase the Collateral amount or partially repay the debt to keep the LTV ratio at the required level.

That’s it, keep an eye on your LTV ratios and keep hodling!

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