Liquidation
When does Liquidation happen
Liquidation happens when the Safety Buffer shown for your position falls to 0.
Debt Value is how many tokens you borrowed from lenders
Position Value is the total value of the farmed position (i.e. the value of your LP tokens, including your provided assets and the assets you borrowed)
Debt Ratio is the Debt Value divided by the Position Value ->
The maths behind the Safety Buffer
| Formula | Value | Desc. | |
|---|---|---|---|
Deposit value in $ | 100 | You, the user, starts the farm with 100$ worth of assets | |
Leverage | 3 | 3x leverage | |
Borrowed amount (debt) in $ | Deposit * (Leverage - 1) | 200 | To create 3x leverage, 2x the amount you deposited has to be borrowed |
Position size in $ | Deposit * Leverage | 300 | Total position size after leverage is applied |
Liquidation threshold | 90% | (Explanation below) | |
Safety Buffer | Leverage / Position size - (1 - Liquidation threshold) | 23% | Tells you how much (in %) your position can lose in value before you get liquidated |
The liquidation threshold in the context of JewelSwap is a dynamic metric rather than a fixed percentage; it is adjusted per farm based on an assessment of each farm's unique risk profile and market volatility. While the threshold itself may vary, it is not an indicator that typical users should monitor.
For normal users, the more important figure is the 'Safety Buffer'. The safety buffer is the actual value indicating when a position gets liquidated. In the above scenario, the position would have to fall by 23% in value for it to get liquidated.
To clarify, the liquidation threshold is instrumental in determining the Safety Buffer—it is a behind-the-scenes calculation that informs JewelSwap when to preemptively close a position to ensure it is managed effectively, especially in unpredictable markets. This preemptive measure is designed to safeguard the position from reaching a state where it is "underwater," meaning the market value has fallen below the debt value, which could result in a more severe financial loss.
Why does my Position Value fluctuate?
All position values are calculated and displayed in one token. Therefore, you might see your position value go down on some days - this is normal. Here is an example:
Avoiding Liquidation
In the case of a liquidation, the position would be closed, and the debt repaid. When the tokens you are holding drop in value significantly, then you need to careful about potential liquidation.
Monitor your Safety Buffer. It tells you how close you are to potential liquidation. Once it reaches zero, you will be liquidated.
Farm less volatile assets. If you are farming stablecoins, liquidation is extremely unlikely. Farming less volatile high marketcap assets is also safer than farming altcoins. But usually, higher risk assets will have higher APYs.
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