# 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.

### 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.

### **Minimum Collateral Ratio (MCR)**

The MCR represents the point at which the maximum amount of capital has been borrowed against a given collateral. 

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

The collateralization ratio of other Dens can impact a user if their total average falls below the TCR (as explained below). This triggers recovery mode, mentioned below:

### Critical Collateralization Ratio (CCR)

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

### Recovery Mode

Recovery Mode is activated when the system’s total collateralization ratio (TCR) falls below the Critical Collateralization Ratio (CCR), which is the same across all collateral markets.

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 (MCR) for that asset, eg 110% on wETH, 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`

<table><thead><tr><th>Condition</th><th>Liquidation Behavior</th><th data-hidden></th></tr></thead><tbody><tr><td><code>ICR &#x3C;= 100%</code></td><td>Redistributes all debt and collateral (minus collateral gas compensation) to active dens</td><td></td></tr><tr><td><code>100% &#x3C; ICR &#x3C; MCR</code></td><td>$NECT from the Stability Pool is burned in exchange for an equivalent dollar value of collateral.</td><td></td></tr><tr><td><p><code>TCR &#x3C; CCR</code> and </p><p> <code>MCR &#x3C;= ICR &#x3C; TCR</code>and</p><p><code>SP $NECT >= Den debt</code></p></td><td>In Recovery Mode, liquidations are handled to prioritize stability. $NECT from the Stability Pool is burned to cover an amount of debt equal to that of the liquidated Den. Stability Pool depositors are compensated with collateral valued at 1.2 times the liquidated debt, while no collateral is redistributed to other active Dens. Any collateral remaining above the Minimum Collateralization Ratio (MCR) is returned to the borrower, and the liquidated Den is then closed.</td><td></td></tr></tbody></table>

### 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](https://beraborrow.gitbook.io/docs/nect-stablecoin/liquid-stability-pool-lsp) section.