When a user's health factor falls below 1, liquidation is initiated to safeguard the protocol from potential bad debt.
In the liquidation process, the user's debt is settled, and in return, liquidators are compensated with the collateral asset.
Post-liquidation, the user's outstanding debt is cleared. The residual collateral value is determined by subtracting 110% of the settled debt from the total position value.
For safety, users are strongly advised to maintain a health factor above 1.5, ideally around 2 or higher.
Liquidators are essential entities, pre-approved by the system, that play a pivotal role in maintaining the protocol's stability. They utilise their resources to address and rectify positions that are vulnerable or detrimental. As compensation for their efforts, they receive the associated collateral and an additional liquidation bonus.