# Liquidation

## Liquidation Process

Each NFT asset in the Pixels.so protocol has specific values related to their risk, which influences how they are supplied and borrowed. The calibration of the parameters such as initial LTV may be adjusted according to each.
When the loan amount plus accrued interest exceeds 75% of the collateralized NFT (loan-to-value ratio), the NFT will appear on a liquidation page for anyone to claim. When claiming an NFT, a user would repay the loan balance plus accrued interest and in return will receive the defaulted NFT. The claim price will be adjusted by +10% and the excess will go into the USDC pool’s insurance fund. An example of this is if you instantly borrow $25,000 on a$100,000 asset, and the initial payment plus interest accrued equals above \$75,000 it will go to the liquidation page for someone to claim at a lower cost than the typical marketplaces.
The insurance fund will act as a safety net protecting lenders in the USDC pool. The fund’s purpose is to protect against severe volatility in the NFT market and will protect against losses in the USDC pool.
If a defaulted NFT exceeds a loan-to-value ratio of 100% it no longer becomes advantageous for users to claim the NFT. In such a scenario the insurance fund will supplementally lower the claim price to incentivize users to claim any defaulted asset(s). The insurance fund will act dynamically so that if the LTV value continues to raise the amount repaid into the USDC pool when claimed. The insurance fund will be funded by excess reserves in the DAO treasury earned through the platform’s net interest income and through the process of claiming defaulted NFTs.

## Risk Parameters Change

When market conditions change, risks change, and so we will continuously monitor the assets integrated into the protocol which sometimes may requires us to quickly adapt by either freezing, delisting, or modifying certain other risk parameters such as initial LTV.

### Loan to Value

The Loan to Value (LTV) ratio defines the maximum amount of currency that can be borrowed with a specific collateral. It’s expressed in percentage: at LTV=75%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.75 ETH worth of the corresponding currency. Once a borrow is taken, the LTV evolves with market conditions.

### Liquidation Threshold

The liquidation threshold is the percentage at which a position is defined as undercollateralised. For example, a Liquidation threshold of 80% means that if the value rises above 80% of the collateral, the position is undercollateralised and could be liquidated.
The delta between the Loan-To-Value and the Liquidation Threshold is a safety cushion for borrowers.

### Liquidation Discount

A discount on the price of collateralized assets when liquidators claim an asset under the Instant Borrowing Model which has exceeded the liquidation threshold. This discount will adjust dynamically to bring the LTV of the associated loan to 98%. The Liquidation Fund will act as a source of liquidity in this scenario.

### Health Factor

For each wallet, these risks parameters enable the calculation of the health factor:
$H_f = \frac{ \sum{Collateral \: in \: SOL \: \times \: Liquidation \: Threshold}}{Total \: Borrows \: in \: SOL}$
When
$H_f < 1$
the position may be liquidated to maintain solvency within the pool of the borrowed asset.

### Reserve Factor

The reserve factor allocates a share of the protocol's interests to a collector contract as reserve for the ecosystem. This reserve is used to sustain the DAO and pay protocol contributors.
Pixels.so's solvency risk is covered by the Insurance Fund, with the incentives coming from the ecosystem reserve. As such, the Reserve Factor is also a risk premium and so it is calibrated based on the overall risk of the asset. Stablecoins are the less risky assets with lower reserve factor while volatile assets hold more risk with a higher factor.
The collector contract will be posted when it is deployed on mainnet.

### NFT Market Capitalization

The market capitalization represents the size of the market, which is important when it comes to liquidating collateral. This can be mitigated through the liquidation parameters: the smaller the market cap, the higher the incentives and lower Initial LTV allowable to borrowers.