Liquidations

As your position accumulates interest, its ratio between collateral and amount owed decreases over time. Eventually, it will fall under the minimum collateralization rate needed for said market, making it eligible for liquidation.

A liquidation is the event of repaying part of or the entire debt associated with a position. If you don’t repay your debt in time, a third-party liquidator will repay the borrowed amount and receive the respective collateral plus a liquidation premium. Anyone can be a liquidator, with Mystic itself acting as the protocol’s first one.

As to how liquidations themselves are conducted, that depends on the liquidity of the market’s collateral asset. Mystic has three liquidation mechanisms for tokens with different liquidity characteristics, namely:

• Liquid tokens - these are assets that can be traded on DEX and are thus able to be liquidated the DeFi-native way: liquidation bots. Mystic runs a liquidation bot ourselves, much like others can too.

• Semi-liquid tokens - these tokens can be redeemed for stablecoins with the respective issuer, but otherwise have no liquidity in any other market or protocol. In this case, Mystic redeems the assets with the issuer before repaying the debt to the lenders. These liquidations range from immediate to T+2, depending on the asset issuer’s redemption process.

• Illiquid tokens - there is no way to get liquidity from the asset. In this case, either Mystic or the vault manager has arranged a third-party liquidator to buy the collateral at a discounted price, or the lenders will directly receive the collateral token in case of a liquidation.