---
description: Liquidation algorithm
---

# Liquidations

In the event of financial instability, identified by a Loan-to-Value (LTV) surpassing the specified Liquidation LTV (LLTV), an account becomes eligible for liquidation within the system.&#x20;

The liquidation process is transparent: liquidators can sell the entire debt of the account and, in return, receive the corresponding collateral value along with an additional incentive.

The Liquidation Incentive (LI) is determined by the LLTV of the market, calculated through the formula:&#x20;

**$LI = \min(M, \frac{1}{\beta \times LLTV + (1-\beta)} -1)$, where $\beta = 0.3$ and $M= 0.20$**

{% hint style="info" %}
Parameters are subject to refinement, but this represents the order of magnitude
{% endhint %}

Here's an illustration of how the Liquidation Incentive varies with LLTV:

<figure><img src="https://3899017684-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FBZXShNtE6OOZ6aWRpS1H%2Fuploads%2FPHUHQI34PTNb6V5wkqJl%2FScreenshot%202023-11-23%20at%204.54.54%E2%80%AFPM.png?alt=media&#x26;token=656eb9f8-9ebe-4343-a9c8-87e252dffae8" alt=""><figcaption></figcaption></figure>

Natrium also incorporates a mechanism to handle bad debt events. In traditional lending pool designs, bad debt typically remains in the market indefinitely.&#x20;

In Natrium, if a liquidation results in an account having remaining debt and no collateral, the loss is acknowledged and distributed proportionally among all lenders. This ensures that the market remains fully operational even after a bad debt event, making it a resilient and user-friendly system.
