Health Factor and Liquidations

Staying safe amid market volatility

Health Factor

GM Lending uses an over-collaterized model, which is maintained by overall pool and individual user health factor requirements.

A user's Health Factor is determined by the following:

• Actual Borrowable Value = summation of a user's collateral values * collateral lending factors * borrow asset's borrowing factor

• Hypothetical Borrow Value = (pending borrow amount (if any) + existing borrow balance) * borrow asset current price

• Health Factor = (Actual Borrowable Value * 1e18) / Hypothetical Borrow Value

The Health Factor is scaled up to 18 decimals, so 1,000,000,000,000,000,000 or 1000000000000000000 is equivalent to 100%.

Position Management

Once you have taken a position, click on the Portfolio tab to retrieve details, such as Current APY, Total Collateral Value, Total Borrow Value, Pricing, and Health Factor.

Ideally, every user manages their positions so that they keep their Health Factor at or above 100%. This helps ensure the overall solvency of the protocol. If a user's Health Factor falls below 100% due to price volatility or other factors, then the user can be liquidated (their collateral assets will be used to pay off their outstanding borrows).

How Liquidations Work

In order to minimize bad debt in the system, GM Lend and Loop features a Liquidations Dashboard, in which the user addresses with the lowest health factors are listed. If there are any addresses with less than 100% Health Factors, then any other user can liquidate those addresses by clicking on the "Liquidate" button. Doing so, the user becomes a "liquidator" and repays a portion or all of a borrower's debt. To incentivize the liquidation process (which helps maintain protocol solvency), liquidators are able to seize the borrower's collateral at a discounted rate. This discount is called the "liquidation bonus" and is currently set at 5%, but can be changed in order to find the optimal incentive point.

Liquidators can repay any non-zero amount of USDC up to and including the borrower's total collateral value (discounted by 5%). After calculating the amount of collateral to seize based off the repayment amount, the liquidator's USDC is transferred to the pool / USDC vault, which decreases the borrower’s outstanding debt. The calculated amount of borrower’s collateral is then transferred to the liquidator, completing the liquidation process.

Depending on how much was repaid, the borrower could still have both active collateral and outstanding borrow amounts within the protocol. Here, it is important to remember that partial liquidations do not bring a borrower back into good Health. Any other user can still liquidate them again, unless they repay some or all of their outstanding borrow first, pushing them over the 100% Health Factor threshold.

Liquidation Bots

Liquidation bots are abound and some will probably be sniffing around the protocol. But if you proactively manage your position, you have nothing to worry about. Liquidation bots will almost assuredly be faster than use of the Liquidation Dashboard, so as traffic increases for the protocol, bots will more than likely take over as the main form of liquidation.