Definition

The Liquidation Protection is the protocol mechanism that ensures the redistribution of balances to prevent a lending liquidation on Aave, when the LTV goes beyond the rate limit defined by the DAO.

Loan to Value (LTV)

The target LTV of the protocol is set to 87%, with a maximum of 93% on which will trigger the liquidation protection and the rebalancing. The maximum LTV allowed on Aave is 95%, which gives the protocol a margin for the trigger to take place.

Flexible Target LTV

Although the target LTV is set to 87%, once liquidation protection is activated, it will be set to 88% for a smoother rebalance and prevent bigger capital losses for the users.

Liquidation Protection: Scenarios

Scenario 1: Depeg of 5% on stETH

Step Collateral (wstETH) Collateral (ETH) Debt (ETH) Debt Ratio ETH/wstETH Assets Target LTV Max LTV Debt to Pay Capital Loss (%)
0 - Initial State 85 100 80 80.00% 0.85 20 80.00% 88.00% 0
1 - Depeg 76.71 95 80 84.21% 0.8075 15 80.00% 88.00% 0
2- Repeg 85 100 80 80.00% 0.85 20 80.00% 88.00% 0 0%

Result: No Capital Loss

Scenario 2: Depeg of 7% on stETH

Step Collateral (wstETH) Collateral (ETH) Debt (ETH) Debt Ratio ETH/wstETH Assets Target LTV Max LTV Debt to Pay Capital Loss (%)
0 - Initial State 85 100 80 80.00% 0.85 20 80.00% 88.00% 0
1 - Depeg 84.58 93 80 86.02% 0.9095 13 80.00% 88.00% 0
2- Repeg 85 100 80 80.00% 0.85 20 80.00% 88.00% 0 0%

Result: No Capital Loss

Scenario 3: Depeg of 10% on stETH

Step Collateral (wstETH) Collateral (ETH) Debt (ETH) Debt Ratio ETH/wstETH Assets Target LTV Max LTV Debt to Pay Capital Loss (%)
0 - Initial State 85 100 80 80.00% 0.85 20 80.00% 88.00% 0
1 - Depeg 84.15 90 80 88.89% 0.935 10 88.00% 88.00% 0
2- Pay Debt 77.92 83.33 73.33 80.00% 0.935 10 88.00% 88.00% 6.67
3- Repeg 77.92 91.67 73.33 80.00% 0.85 18.33 80.00% 88.00% 0 -8.33%

Result: Minor Capital Loss