Liquidation

📖 Liquidation Mechanism in Centuari Protocol

In the Centuari protocol, the liquidation mechanism serves as a risk management tool to maintain the health of the lending system. It allows third-party liquidators to close borrower positions under specific conditions:

• The loan has passed its maturity date, or

• The borrower's position has fallen below the required health factor.

Liquidators repay the borrower’s outstanding debt and, in return, receive the borrower’s collateral as compensation.

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Liquidation flow

📌 Liquidation Execution Flow

The liquidate() function handles the liquidation process through the following steps:

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📌 1️⃣ Validation of Borrower and Conditions

Before proceeding, the function validates:

• That the borrower’s address is not zero.

• That the borrower’s position is eligible for liquidation:

  • The maturity date has passed (if a maturity is set), or

  • The borrower's health factor is below the allowed threshold.

Example:

if (user == address(0)) revert CentuariErrorsLib.InvalidUser();
if ((block.timestamp < config.maturity && config.maturity != 0) 
    || _isHealthy(config.id(), rate, user)) {
    revert CentuariErrorsLib.LiquidationNotAllowed();
}

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📌 2️⃣ Fetch Borrower Position Data

The protocol retrieves the borrower’s current position data from the corresponding DataStore contract based on the market configuration:

Example:

IDataStore dataStore = IDataStore(dataStores[config.id()]);

uint256 totalBorrowShares = CentuariDSLib.getTotalBorrowShares(dataStore, rate);
uint256 totalBorrowAssets = CentuariDSLib.getTotalBorrowAssets(dataStore, rate);
uint256 userBorrowShares = CentuariDSLib.getUserBorrowShares(dataStore, rate, user);
uint256 userCollateral = CentuariDSLib.getUserCollateral(dataStore, rate, user);

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📌 3️⃣ Calculate Borrower’s Outstanding Debt

Since Centuari employs share-based accounting (similar to ERC-4626 vault mechanisms), the borrower’s debt is computed proportionally based on their borrow shares relative to the total borrow shares.

Example:

uint256 debt = (userBorrowShares * totalBorrowAssets) / totalBorrowShares;

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📌 4️⃣ Update the DataStore Records

Once the borrower’s debt is determined:

• The system subtracts the borrower’s shares and corresponding assets from the total pool.

• The borrower’s loan shares and collateral positions are reset to zero.

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📌 5️⃣ Asset Transfers

The liquidation involves two on-chain asset transfers:

• The liquidator transfers loan tokens (e.g., USDC) equivalent to the borrower’s debt to the protocol.

• The liquidator receives the borrower’s collateral (e.g., WBTC) in return.

Example:

IERC20(dataStore.getAddress(CentuariDSLib.LOAN_TOKEN_ADDRESS))
    .safeTransferFrom(msg.sender, address(this), debt);

IERC20(dataStore.getAddress(CentuariDSLib.COLLATERAL_TOKEN_ADDRESS))
    .safeTransfer(msg.sender, userCollateral);

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📌 6️⃣ Emit Liquidation Event

The contract emits an event to log the liquidation for transparency, analytics, and indexing by off-chain services (e.g. The Graph, Etherscan).

Example:

CentuariEventsLib.Liquidate(
    config.id(),
    msg.sender,
    rate,
    user,
    userBorrowShares,
    userCollateral
);

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📊 Example Liquidation Scenario

Assumptions:

• Borrower A has taken a loan of 500 USDC, using 1 WBTC as collateral.

• Borrower A holds 5 borrow shares out of 50 total shares in the pool.

• Total outstanding debt in the pool is 5000 USDC.

Debt Calculation:

debt = (5 / 50) * 5000 = 500 USDC

Liquidation Process:

• The liquidator transfers 500 USDC to the contract.

• The liquidator receives 1 WBTC as collateral.

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✨ Key Advantages of This Design

✅ Open Liquidation System: Anyone can act as a liquidator and claim collateral from unhealthy positions. ✅ Share-Based Accounting: Scalable and dynamic, ensuring fair debt and collateral calculations. ✅ Event Logging: Transparent on-chain event emission enables robust tracking and off-chain integrations. ✅ Market-Specific Configurations: Liquidation eligibility and parameters are determined per-market basis.

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📌 Summary

The Centuari protocol’s liquidation mechanism is designed to:

• Secure the protocol against bad debt

• Maintain lending pool health

• Reward third-party liquidators

• Protect the interests of other lenders in the pool

It operates through a secure, event-driven, share-based system that balances flexibility and protocol integrity.

Contract related: liquidation , interface