Liquidation
Horizon Protocol requires the maintenance of collateral to ensure that all zAssets are backed by an underlying asset. In the case of Horizon Protocol, the underlying asset is the HZN token. The worst-case scenario occurs when the underlying asset's value is worth less than zAssets, indicating that zAssets are no longer completely backed.
To prevent this scenario, one of the mechanisms employed by Horizon Protocol is the liquidation mechanism. This mechanism allows wallets that have gone below the safe C-Ratio (collateralization ratio) threshold to be liquidated by a third party to bring them back to a safe C-Ratio and ensure that the protocol’s zAssets remain sufficiently collateralized.
The liquidation mechanism involves two steps:
Flagging for Liquidation:
Wallets below the safe C-Ratio threshold are flagged for liquidation.
Flaggers receive a flat fee of HZN from the flagged wallet. Flagging adds the wallet to a Liquidation List.
Liquidation Process:
Flagged wallets become eligible for liquidation after 12 hours.
A liquidator can perform liquidation without zUSD collateral and earns a flat fee of HZN (currently 200 HZN) from the wallet being liquidated.
This process streamlines the operation, involving a straightforward blockchain call and a flat fee reward. Importantly, the wallet that undergoes liquidation covers the flagging and liquidation fees provided to the user who initiates the liquidation.
The liquidation mechanism deducts HZN from the wallet being liquidated until the correct C-Ratio is restored, along with an additional penalty. The initial HZN repays the debt, while the penalty HZN is deposited into a pooled contract redistributed to stakers based on their Debt Share.
Note: Liquidated HZN requires claiming and is escrowed for six months. There is no deadline for claiming unclaimed HZN from liquidation rewards, and they can still be used as collateral to back zUSD.
Liquidation using Escrowed HZN
Escrowed HZN can be utilized in the liquidation process. When a wallet is liquidated, it will first liquidate the wallet’s HZN. If insufficient, it taps into the HZN locked in the Escrow contract.
When accessing the Escrow contract for HZN, the protocol will take the most recent escrow entries and unlock them in descending order until enough HZN has been unlocked to restore the wallet’s C-Ratio. Any leftover HZN unlocked from escrow will be put back into escrow as a new entry with the same vesting deadline as the last entry unlocked. All HZN liquidated from escrow will move to the LiquidatorRewards contract for distribution back to HZN stakers and escrowed for 1-year once claimed.
Self-Liquidation
Self-liquidation serves as an alternative method for stakers to restore their C-Ratio. This mechanism allows users to restore their C-Ratio by leveraging the HZN in their wallet, providing an option other than burning zUSD. This is particularly useful when a staker's zUSD is locked up, leaving no alternative but to burn HZN.
This option becomes available whenever the staker's C-Ratio falls below the target. After confirmation from the user, the protocol initiates the self-liquidation process, facilitating the liquidation of HZN from their wallet to settle the debt. However, it's important to note that this comes with a penalty of 50%, which can be adjusted through HIPs.
Similar to ‘Forced Liquidation’, any HZN liquidated through self-liquidation is directed to the LiquidatorRewards contract. This ensures fair distribution back to HZN stakers, and the rewards are escrowed for 1-year once claimed.
Note: users cannot self-liquidate using escrowed HZN.
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