Borrowers in default are subject to liquidated damages typically set at 8% of any debt covered in liquidation.
Borrowers in default are subject to liquidated damages (a surcharge), which is applied to any debt covered in liquidated and collected in collateral tokens. Liquidated damages are split between liquidators (typically 5.2%) as a liquidation incentive and the protocol (protocol liquidated damages, typically set at 2.8%).
Liquidated Damages Example
Liquidated Damages = 8%
Protocol Liquidated Damages = 2.8%
Liquidation Incentive = 8% - 2.8% = 5.2%
Repurchase Exposure covered in liquidation = 100,000 USDC
Markt price of (USDC) based on price oracle = $1.01
Market value of (ETH) based on price oracle = $1,800
Fair Value Liquidation = 56.111 ETH = 100,000 USDC * 1.01 USD/USDC / (1,800 USD/ ETH)
Liquidated Damages = 4.4889 ETH = 8% * 56.111 ETH
Liquidation Incentive = 2.9178 ETH = 5.2% * 56.111 ETH
Protocol Liquidated Damages = 1.571 ETH = 2.8% * 56.111 ETH
