Liquidation Process

The liquidation process in Kawa is designed to maintain the solvency and stability of the protocol by providing incentives for users to engage in liquidation when a borrower's collateral falls below the required threshold. This section outlines the key aspects of Kawa's liquidation process.

Liquidation Incentives

Kawa's liquidation incentives steadily increase over time to encourage user engagement, starting at 10% plus a premium to allow the discount to rise as a function of how underwater a position is. The market forces dictate how high the incentives need to be to attract liquidators.

Liquidation Mechanism

When a borrower's collateral falls below the required threshold, liquidation begins. Liquidators must have the same collateral on the same Kawa Port where the underwater user's collateral is located. On-chain or through the UI, it will be possible to see that a liquidation has begun, preventing multiple entities from trying to liquidate more than the eligible amount.

Kawa features stabilization pools that provide sitting liquidity for liquidations, which benefit from the liquidation incentive. However, liquidation remains open to any entities, ensuring that Kawa can rely on multiple ways to maintain solvency.

Kawa assumes that sophisticated players are omnichain and, given enough incentive, will take advantage of the liquidation opportunities available to them.

Liquidation Process Flow

• A borrower's collateral falls below the required threshold, triggering the liquidation process.

• Liquidators with the same collateral on the same Kawa Port engage in the liquidation process.

• The liquidation process is visible on-chain or through the UI, preventing duplicate liquidation attempts.

• Kawa's stabilization pools provide sitting liquidity for liquidations, benefiting from the liquidation incentive.

• Liquidation remains open to any entities to ensure multiple ways of maintaining solvency.

By implementing a robust liquidation process, Kawa ensures the stability and solvency of the protocol, providing a secure environment for cross-chain borrowing and lending.