Risk management
Liquidation thresholds in details

Liquidation Threshold in details

Gearbox uses Chainlink price feeds (as do Aave and Compound) to estimate Credit Account’s Health Factors. The problem here is to set correct values of Liquidation Thresholds, so that while a liquidation is in progress (a liquidation always takes some time), the price does not become too low,resulting in a loss of LP's funds.

This problem can be formulated in math language as

LT1dPfLfp,LT \le 1 - dP- f_L-f_p,

where dPdP is max price drop during liquidation time, fLf_L - liquidation fee (goes to liquidator), fpf_p - liquidation premium.

Last updated on December 25, 2022