A user who has negative account liquidity is subject to liquidation by other users of the protocol to return his/her account liquidity back to positive (i.e. above the collateral requirement). When a liquidation occurs, a liquidator may repay some or all of an outstanding borrow on behalf of a borrower and in return receive a discounted amount of collateral held by the borrower; this discount is defined as the liquidation incentive.
A liquidator may close up to a certain fixed percentage (i.e. close factor) of any individual outstanding borrow of the underwater account. Unlike in v1, liquidators must interact with each dToken contract in which they wish to repay a borrow and seize another asset as collateral. When collateral is seized, the liquidator is transferred dTokens, which they may redeem the same as if they had supplied the asset themselves. Users must approve each dToken contract before calling liquidate (i.e. on the borrowed asset which they are repaying), as they are transferring funds into the contract.


Scenario 1:

User A supplied (deposited) 100 ETH and borrowed 50 ETH worth of USDC.
If the spot price of ETH fluctuates and causes his/her account liquidity to negative.
A liquidator can repay 50% of a single borrowed amount equal to 25 ETH worth of USDC.
In return, the liquidator can claim a single collateral which is ETH (10% bonus).
The liquidator claims 25 ETH + 2.5 ETH for repaying 25 ETH worth of USDC.

Avoid being liquidated

There are two ways to avoid liquidation. Users can supply (deposit) more collateral assets to enhance the account liquidity and avoid being liquidated. Besides, users may repay part of its repayment or even the entire repayment in order to avoid a liquidation. Therefore, all users are recommended to check their account liquidity regularly, in case a liquidation occured.