Forced Liquidations
The term liquidation simply means selling assets for cash. Forced liquidation means that this selling happens automatically, when certain conditions are met. In the context of cryptocurrencies, forced liquidation happens when the investor or trader is unable to fulfill the margin requirements for a leveraged position.
When borrowing from Fortress, if your collateral value drops below the max collateral ratio, you could then be force liquidated, and would be charged a liquidation fee and receive any remaining collateral, if any. The liquidation fee exists to incentivize traders to manually close their positions before they’d have to be automatically liquidated. A liquidator in this example would be incentivized to liquidate the collateralized position.
Each individual money market may have its own max collateral ratio. When choosing to borrow assets from Fortress, the higher the ratio of amount borrowed to the collateral value, the higher the risk of liquidation. If an asset allows a max collateral ratio of 70%, and a user decides to borrow the 70% max, the value of the supplied collateral only needs to fall 30% before the user is liquidated.
Last modified 1yr ago