Automatic Liquidations of risky CDPs

The value of collateral in every active CDP is constantly monitored by the Honzon Protocol to ensure that the associated outstanding debt in aUSD can be recovered anytime by selling the collateral. The Honzon Protocol triggers a liquidation of an active CDP if it is considered to be too risky, i.e. when the current collateral-to-debt ratio of the CDP reaches the liquidation ratio of the asset type that the collateral belongs to.

After a liquidation is triggered, the Honzon Protocol will run a special auction mechanism in order to cover the outstanding debt by selling the minimum proportion of the collateral as possible.

  • Firstly, the entire collateral of the CDP will be auctioned in an ascending auction automatically to any potential buyers on the market until the leading bid in aUSD reaches preset aUSD goal, the sum of the outstanding debt and the liquidation penalty.
  • Then, once such a bid has been reached, the auction switches to a descending reserve auction that allow any potential buyers to bid the minimum amount of the collateralized asset they are willing to accept by paying the amount of the preset aUSD goal. Auction ends when no lower bid is placed within the auto extension period.
  • Lastly, the part of collateral sold in the auction mechanism is transferred to the auction winner, and any remaining collateral is returned to the original CDP holder. The amount of the aUSD that is equal to the outstanding debt of the CDP is burnt, and the remaining amount of the aUSD paid as the liquidation penalty is converted to ACA tokens automatically and burnt permanently from the ACA supply. And the Honzon Protocol closes the CDP.

In rare situations when the auction mechanism fails to reach the preset aUSD goal, another auction will be run to raise enough aUSD to cover the uncovered difference in outstanding debt in the CDP, by running a descending auction to sell the minimum amount of ACA tokens possible to gain enough amount of aUSD to close the CDP.

Since we support CDP to be collateralized with multiple types of crypto assets, risks associated with different types of assets are considered by setting different liquidation ratios for CDPs collateralized with a different type of assets, which is adjustable in real-time by the Honzon Protocol.

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