Collateral Ratio and Liquidation

Collateral Ratio

The ratio of your collateral's value (e.g. iBGT) to your NECT debt. It's vital to maintain this ratio above the minimum threshold to avoid liquidations.

Minimum Collateral Ratio (MCR)

It is the collateral ratio by which you can have greatest capital efficiency, but you risk redemptions and sudden collaterall price volality can trigger liquidations against your Den.

E.g. with an MCR is set at 120%, a Den holding a debt of 20,000 $NECTrequires a collateral value of no less than $24,000 to safeguard against liquidations.

The other Dens collateralization ratio can also affect you if their total average goes below the TCR, explained below, which would trigger recovery mode, and your Den would be the first falling into liquidations.

Total Collateral Ratio (TCR)

Refers to the proportion of the total value of all collaterals within the protocol, at their present prices, to the total outstanding debt across the protocol

Calculation:

The Total Collateral Ratio (TCR) for a specific collateral market is calculated as follows:

$$\text{TCR} = \frac{\sum_{i=1}^{n} (\text{denBalance}_i \times \text{collPrice})}{\text{totalDebt}}$$

Where:

• denBalance is the density of the i-th collateral.

• colPrice is the price of the collateral.

• totalDebt is the total debt of the collateral market, denominated in $NECT, assumed to be $1.

Critical Collateralization Ratio (CCR)

The system enters Recovery Mode when this value is greater than or equal to the TCR.

Recovery Mode

Recovery Mode ensures the overall system collateralization ratio, each collateral market has a different recovery mode, defined for its specific CCR.

Its objective of Recovery Mode is to encourage actions that increase the Critical Collateralization Ratio (CCR) back to healthy levels.

Liquidations

Liquidations are designed so they're easy to execute for anyone with a single call to liquidate while using our helper contracts MultiDenGetter. Also, you will have a fixed reward to subsidize your gas cost + a premium.

Liquidation Process

If your loan falls below the minimum collateral ratio of 110%, it may be subject to liquidation, resulting in a loss of collateral. Borrowers should aim to keep the collateral ratio above 150%.

Types of Liquidations

ICR = Individual Collateral Ratio

MCR = Minimum Collateral Ratio

TCR = Total Collateral Ratio

SP = Stability Pool

Condition	Liquidation Behavior
ICR <= 100%	Redistributes all debt and collateral (minus collateral gas compensation) to active dens
100% < ICR < MCR	Stability Pool $NECT is used at an equal amount of debt than that from the Den. Part of the Dens collateral is shared among depositors, proportional to the ratio of its offset debt to its total debt. Any remaining debt and collateral, minus collateral gas compensation, is redistributed to active vaults.
TCR < CCR and MCR <= ICR < TCRand SP $NECT >= Den debt	It means the protocol is in Recovery Mode. Stability Pool $NECT is used at an equal amount of debt than that from the Den. The difference is that a fraction of collateral value (1.2 * debt) is shared between stability pool depositors, but not other active Dens. Collateral over MCR is claimable by the borrower. Den is closed.

What happens when the Stability Pool lacks funding for liquidating?

When the Stability Pool lacks funding for liquidating 'Redistribution' comes into play. The system reallocates the $NECT and the collateral within liquidated Dens to all active Dens. The reallocation each Den gets is based on its collateral value.

For more information on collateral claiming instructions, please read the Stability Pool section.