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Risk Management (Liquidations)
Risk Management (Liquidations)

What is Liquidation and how to manage your portfolio to avoid liquidation

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Written by Trader Joe
Updated over a week ago

Borrowing Tokens is not free, you pay daily interest on your borrowed position. When Borrowing tokens, it's important to keep sufficient collateral so that you do not get liquidated.

What is 'Liquidation'

  • Liquidation is the process of selling collateral assets to cover the debt.

  • This process is automated by a smart contract.

  • This can happen if the market has volatile price movements, shifting a portfolio position into 'debt'

Have you been Liquidated?

Don't panic or fret. Often, many users assume that liquidation comes at a great cost. If you are liquidated, the liquidators will seize your full collateral up for liquidation to resolve the bad debt and take a percentage (typically 5%) of that collateral as their fee. They will then return the remainder of the collateral they have seized directly to you. You'll be able to redeem the rest of this collateral by going to the Supply side market from which they seized the tokens. So, for example, if you are borrowing AVAX, they'll return jAVAX back to you.

Tip to Avoid Liquidation

  • Add more of the supplied collateral, to improve the collateralization ratio.

  • Or, pay back part of the existing debt.

Users of Banker Joe should maintain proper risk management with their portfolio. Maintain a large buffer between your collateral and borrowed debt to reduce risk of liquidation.

Liquidation Process in Detail

  • Liquidations can happen if market has sudden price movements and cause collateral value < borrowing value.

  • It can also happen, after time, if your total deposit APY < total borrow APY. This means that your borrowing interest rate is greater than your deposit APY.

  • You can monitor your Net APY and borrow limit used to avoid liquidations.

    • Positive Net APY means that your deposit interest will pay for your loan interest.

    • A lower borrow limit used will present less liquidation risk.

    • If borrow limit used increases and becomes too high, you may repay some borrowed tokens, or add more collateral.

Using an Application to monitor your Liquidation Threshold

The DeFi Notifications Protocol App lets you set a custom threshold notification to monitor your borrowing health when engaging in lending/borrowing on Banker Joe. This app is fully decentralised, free and monitors on-chain data. When breaching your set threshold, you will receive a notification on your device providing you with enough warning and time to manage your positions accordingly.

You can download the app from here:



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