Liquidations
Liquidation is a core risk management mechanism in MemeLend, designed to maintain protocol solvency and protect suppliers. It occurs when a borrower's position becomes undercollateralized, typically when their Health Factor drops below 1.0.
What Triggers a Liquidation?
A position may be liquidated when:
Collateral Value Drops
Market volatility causes the value of your supplied assets to fall.
Debt Value Increases
The value of the borrowed asset rises relative to your collateral.
Interest Accrual
Unpaid interest accumulates, pushing your total debt beyond safe limits.
Reminder: Always monitor your Health Factor, especially in volatile markets. Keeping a safe buffer (e.g. HF > 1.5) is recommended to reduce liquidation risk.
What Happens During Liquidation?
When a borrower's Health Factor falls below 1.0, their position becomes eligible for liquidation. At this point, third-party liquidators can step in to help maintain the protocol's solvency.
Repayment by Liquidator
A liquidator can repay up to 50% of the borrower's outstanding debt in a single asset.
Collateral Seizure
In return, the liquidator receives an equivalent amount of the borrower’s collateral, plus a liquidation bonus.
Liquidation Bonus
This bonus incentivizes liquidators and compensates them for the risk. The exact bonus rate varies by asset and is defined in the protocol’s risk parameters.
Liquidation Example
Let’s walk through a sample liquidation scenario to see how the process works on MemeLend.
M below represents the ticker for MemeCore Token
Alice deposits 100 M and borrows 100 USDC.
If Alice's health factor drops below 1, her position becomes eligible for liquidation.
Collateral Supplied
100 M
Borrowed Amount
100 USDC
Health Factor Drops Below
1.0
A liquidator can then:
Repay up to 50 USDC (50% of the borrowed amount)
Receive M from Alice's collateral, including the liquidation bonus
Collateral Supplied
100 M
Liquidator Repays
50 USDC (50% of debt)
Liquidation Bonus (M)
10%
Result
Alice’s debt is partially reduced.
The liquidator earns a profit through the liquidation bonus.
Protocol solvency is maintained by removing undercollateralized risk.
Total Value Received by Liquidator
55 USDC worth of M (50 + 5 bonus)
Collateral Taken from Alice
Equivalent to 55 USDC in M
Close Factor
The Close Factor is a key parameter in MemeLend’s liquidation process. It determines the maximum portion of a borrower's debt that can be repaid in a single liquidation transaction. This mechanism balances protocol risk management with fairness to borrowers.
Close Factor
Max % of a borrower's debt that can be repaid in a single liquidation event.
Minimum Close Factor
Starts at 10% (0.1) when liquidation is first triggered.
Critical Borrowed Value
The debt level at which the Close Factor reaches 100% (full liquidation).
Complete Liquidation Threshold
Set to 70% (0.7) – defines how far a position must deteriorate to allow full liquidation.
Small Position Rule
Positions below a certain size are always eligible for 100% liquidation.
Governance-Controlled
All parameters can be adjusted via protocol governance.
Dynamic Scaling of Close Factor
The Close Factor is dynamic and scales based on how undercollateralized a borrower’s position becomes.
It increases linearly from the Minimum Close Factor (10%) to 100% as the position nears the Critical Borrowed Value.
This prevents full liquidation at early stages and allows full liquidation only for highly risky positions.
Implications for Users
Understanding how the Close Factor operates is crucial for both borrowers and liquidators, as it directly impacts liquidation outcomes and risk exposure.
For Borrowers
As your Health Factor declines, a larger portion of your debt becomes eligible for liquidation in a single transaction.
This scaling mechanism creates a strong incentive to maintain a healthy collateralization ratio, especially during volatile market conditions.
Early intervention can prevent partial or full liquidation (by repaying debt or adding collateral).
For Liquidators
The amount you can liquidate in a single transaction increases as the borrower's position becomes more undercollateralized.
When a position nears the Critical Borrowed Value, it may be fully liquidatable (Close Factor = 1.0).
This rewards liquidators who act efficiently and identify high-risk positions with greater liquidation potential.
Understanding the Close Factor mechanism empowers users to manage risk effectively and anticipate how market movements may impact their borrowing positions.
How to Protect Your Position from Liquidation?
Monitor Your Health Factor
Keep your health factor well above 1.0. A higher health factor provides a larger safety margin.
Add Collateral
Deposit additional assets to increase your collateralization ratio.
Repay Debt
Reducing your borrowed amount will improve your health factor.
Use Risk Management Tools
Consider using tools that can help monitor your position and alert you to potential risks.
Be Aware of Market Volatility
Pay attention to price fluctuations, especially for volatile assets or stablecoins that may depeg.
Participating in Liquidations
Liquidations on MemeLend are open to all users and play a vital role in maintaining protocol stability. However, effective participation requires preparation and technical capability.
Highly Competitive Environment
Liquidation opportunities are often claimed within seconds. Competition is intense.
Automation is Essential
Most successful liquidators use bots or automated systems to detect and execute liquidations in real time.
Technical Expertise Required
Participating effectively demands a strong understanding of the protocol, smart contracts, and on-chain transaction timing.
The liquidation market is highly competitive.
Most successful liquidators use automated systems and bots.
Participating effectively requires technical knowledge and quick reaction times.
Want to be a Liquidator?
If you're interested in becoming a liquidator, check out our Developer Documentation for technical guides, contract references, and integration tips.
Reminder: While liquidations are essential for protocol health, they can result in losses for borrowers. Always borrow responsibly and maintain a safe Health Factor to avoid liquidation.
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