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Liquidation Design

Conditions under which positions become liquidatable and who can trigger them.

Overview

In Avana, the liquidation lifecycle is a core safety mechanism to protect both the protocol and its liquidity providers from losses due to undercollateralized loans. Liquidation mode is activated when a position's accrued debt exceeds its borrowing capacity.

Under this mode, any account can clear the debt and earn a liquidation premium, which ranges from 2% to 10% based on the position's debt-to-value ratio. The liquidation process initially utilizes uncollected fees from the position. If these are not enough, the principal assets are tapped to cover the remaining debt and to reward the liquidator.

Trigger:Liquidation is triggered when a position's accrued debt > BorrowingCapacity.

LP Collateral Complexity

LP-backed positions are more complex than single-token loans because they involve:

  • Multi-Token Compositions

    LP positions contain multiple tokens (e.g., ETH–USDC, WETH–DAI) that must be unwrapped and handled separately during liquidation.

  • Impermanent Loss Risk

    LP value can change due to impermanent loss, requiring accurate real-time valuation during liquidation.

  • ERC-20 vs NFT Mechanics

    Different LP types (Uniswap V2/V3/V4) require different unwrapping and handling logic.

  • Multi-DEX Swap Execution

    Underlying tokens must be swapped across multiple DEXes (Uniswap, Curve, Balancer, PancakeSwap, Aerodrome) for optimal execution.

Key Principles

Target Health Factor (HF)

The protocol aims to restore HF to 1.2 whenever HF drops below 1 or a configurable warning threshold. Partial liquidations are preferred to minimize collateral loss and market impact.

Minimal Intervention

Compute exact debt needed to restore HF using the formula:

x = (HF_target × D − C × LT) / HF_target

Where: D = current debt, C = collateral value (oracle), LT = liquidation threshold, HF_target = desired HF (default 1.2). Only this portion of debt is liquidated; the rest of the position remains intact.

Protocol-Owned Flashloan Execution

Avana can orchestrate flashloan-backed liquidation execution through specialized protocol nodes that repay debt, seize LP collateral, unwrap LPs, route underlying assets, and settle execution liquidity in a single atomic transaction. This reduces dependence on third-party liquidators without removing permissionless participation.

Escalation to Full Liquidation

If HF cannot be restored due to sudden price moves or low liquidity, the protocol escalates to full liquidation to maintain solvency.

User Transparency

Real-time dashboard displays partial liquidation amounts and potential full liquidation scenarios. Users can see exact HF changes, debt covered, and expected collateral adjustments.

Liquidation Node

Avana Node is the protocol's indexing and liquidation bot runtime. It handles liquidity operations and routing, tracks active positions, refreshes market and debt state in real time, and reacts as soon as a position falls below its allowed borrowing capacity. Rather than relying only on generic third-party liquidators to interpret complex LP collateral, Avana operates specialized nodes built for LP-specific workflows such as fee claiming, full LP unwind, asset routing, flashloan repayment, and residual value return.

Runtime Model

  • Reads directly from on-chain activity and maintains an in-memory map of active positions
  • Refreshes drifting debt values on short intervals for faster liquidation readiness
  • Performs periodic full-system sweeps to catch missed updates or stale state
  • Feeds the application UI and protocol dashboards from one consistent shared data layer

Execution Path

  • Sources temporary liquidity and repays debt into the credit layer
  • Claims accrued LP fees and unwinds collateral into its underlying assets
  • Repays execution liquidity, pays the liquidation premium, and preserves atomic settlement
  • Returns any residual value to the borrower before closing or resizing the position

Risk Management

Specialized nodes improve liquidation coverage for LP collateral that is traditionally harder to service and provide a reliable first line of defense against bad debt during stressed conditions.

Product Defensibility

This architecture supports LP collateral markets that traditional lending systems struggle to service, helping Avana build a differentiated credit engine around active on-chain liquidity.

Scalability

The runtime is intentionally lightweight at launch, making it easier to expand from a lean single-runtime model into broader market coverage without changing the core operating model.

Liquidation Pathways

Liquidation in Avana has two distinct pathways:

User-Initiated Liquidation

Occurs when an external party identifies an undercollateralized loan.

  • • Liquidator calls the liquidate function with tokenId and permitData
  • • Spoke validates the loan's unhealthy status
  • • Calculates liquidationCost (debt + bonus) and liquidationValue (assets to seize)
  • • Executes _sendPositionValue via Uniswap's decreaseLiquidity and collect
  • • Precise, surgical process targeting a single loan

Hub-Initiated Liquidation

A broader, systemic event when the Hub needs to cover bad debt.

  • • Hub calls handleLiquidation(debtToCover)
  • • Spoke iterates through active loans, starting from most underwater
  • • Extracts liquidity and fees from each position
  • • Uses SwapRouter to convert tokens (ETH, WBTC) into Hub's requested asset (USDC)
  • • Proceeds are repaid to the Hub
  • • Incremental and health-targeted to minimize disruption

External Liquidator Flow

  1. Liquidator transfers liquidationCost in asset to Avana
  2. Avana extracts partial position liquidity proportional to liquidationValue
  3. Collected tokens transferred to liquidator
  4. Debt shares reduced for the loan
  5. State cleaned up for loans reaching zero shares

Liquidation Threshold (LT)

The Liquidation Threshold is the point at which a borrower's debt relative to the collateral value triggers eligibility for liquidation. It is set slightly above the borrowable LTV to provide a safety buffer.

Example: If the borrowable LTV is 66% for an ETH/USDC LP, the LT might be 70–75%. This gap ensures the position remains safe under normal market fluctuations but allows liquidators to act if risk exceeds tolerance.

Fair Resolution:During liquidation, the necessary value is extracted from the position to settle the debt and pay the liquidator's premium. The assets remaining after these deductions stay within the position, which is then automatically returned to the original owner.

Liquidation Bonus

Liquidators receive a bonus percentage of the collateral as an incentive to act quickly when positions exceed the LT. The bonus varies depending on the pool type:

LP CategoryLiquidation BonusNotes
Stablecoin LPs5%Low volatility, minimal IL risk
ETH/Stable LPs6–8%Moderate volatility
Blue-chip / Volatile LPs8–12%Higher volatility, deeper liquidity
Small-cap / Governance LPs12–15%Highest risk, lower liquidity

This encourages timely liquidation while keeping the system solvent.

Who Can Liquidate

Liquidations remain permissionless, but Avana also operates specialized liquidation nodes to improve coverage for complex LP collateral:

  • Liquidation Bots

    Automated systems that monitor positions and execute liquidations for profit. Most liquidations are performed by bots.

  • Individual Users

    Any user with sufficient capital can manually liquidate positions through the contract interface.

  • Avana Liquidation Nodes

    Protocol-operated backstop runtimes that monitor active positions, route liquidity, and execute LP-specific liquidation workflows when speed and coverage matter most.

  • Aave v4 Hub

    The Hub can call handleLiquidation to cover Hub-level deficits by iterating through unhealthy loans.

Protection Mechanisms

Several mechanisms protect borrowers and the protocol:

  • Close Factor

    Liquidators can only repay up to 50% of debt per transaction, giving borrowers a chance to recover their position.

  • Fees First

    Uncollected fees are used first before tapping principal assets, preserving as much of the original position as possible.

  • Residual Return

    Any leftover value after debt + premium is preserved for the original owner and the (possibly modified) position is returned.

  • Oracle Safeguards

    Price feeds include circuit breakers and TWAP smoothing to prevent manipulation-driven liquidations.