model-liquidation-seizure-and-bonus

Model liquidation seizure and bonus

A liquidation repays part of the debt and seizes collateral plus a bonus; the position only recovers if the seizure restores HF >= 1, and any shortfall becomes protocol bad debt.

Procedure

1. Read the reserve parameters: liquidation threshold, liquidation bonus (e.g. 1.05 = 5%), close factor (Aave 0.5).

   cast call $POOL "getConfiguration(address)(uint256)" $ASSET --rpc-url $RPC

2. Max repayable = closeFactor * debt. Collateral seized in value = repay * liquidationBonus.

3. Repay to reach a target HF: solve collateral_weighted / (debt - R) = HF_target. For HF_target = 1, R = debt - collateral_weighted.

4. Worked example — weighted collateral $11,760, debt $12,000 (HF 0.98):

   • R = 12,000 - 11,760 = 240.
   • close factor caps repay at 0.5 * 12,000 = 6,000, but only 240 is needed.
   • seized collateral value = 240 * 1.05 = 252, taken in the collateral asset.
   • if instead weighted collateral were 8,000 with 12,000 debt, even the full 50% repay leaves debt 6,000 against 8,000 weighted, and full seizure to zero still leaves 12,000 - 8,000 = 4,000 bad debt.

5. Liquidator profit = seized_value - repay_value - gas - unwind_slippage. On thin collateral pools the bonus is eaten by DEX slippage when converting to stables.

6. Flag any position where debt > Σ weighted_collateral: it cannot be healed at HF = 1 and belongs in the bad-debt waterfall.

Pitfalls

• Ignoring the close factor: it caps repay at 50% on Aave (higher on isolated markets) and changes the recovery math.
• The bonus is denominated in the collateral asset; when that asset is illiquid the nominal bonus is not realizable.
• Bad debt is only visible after collateral reaches zero, so a healthy-looking HF at the moment of liquidation can still leave a deficit.

Verification

python3 -c "d=12000; w=11760; print(min(d-w, 0.5*d), (d-w)*1.05)"
240.0 252.0

Matches the LiquidationCall event (debtToCover and liquidatedCollateralAmount) for the same position.

Report repay, seized collateral, bonus, and any residual bad debt, each with the reserve param call behind it.