Though it’s an uncomfortable reality of collateralized borrowing, liquidations are simply a part of the process. It is imperative for users to understand both why these are necessary, and how to avoid being liquidated themselves when using MOR.
When a user opens a vault and borrows MOR, they are depositing another asset as collateral to back the loan (which is the MOR that is in circulation). In order to address the risk presented by the volatility of many tokens, MOR takes an overcollateralized approach (as successfully implemented by Maker DAO), and sets a minimum collateralization ratio for each token — based on its individual risk profile. The current minimum ratios are below (as of September 2021, though these parameters will be able to be changed by the DAO):
- 102% for MOR/BUSD and BUSD/USDC
- 150% for BNB/BUSD, CAKE/BUSD, BTCB/BUSD, ETH/USDC
- 175% for CAKE and BANANA
- 175% for ETH/BNB, CAKE/BNB, BTCB/BNB
The % refers to the minimum amount (in dollars) of collateral required for every 100 MOR that is minted.
These ratios are important to prevent unlimited minting of MOR, and ensuring that each MOR is appropriately backed by the assets held in its reserve (effectively acting as insurance for the MOR you are borrowing).
What happens when a liquidation occurs?
For a liquidation to occur your collateral has to fall below the aforementioned ratios, and this will trigger the protocol to take your collateral, sell it for BUSD & then convert those funds into MOR via the PSM. The user still holds the borrowed MOR, however the protocol now has a greater reserve amount as result of the liquidation in the System Surplus.
What can I do to avoid liquidation?
In order to ensure a low-risk approach with your MOR borrowing, it is always recommended to maintain a collateralization ratio that is much higher than the minimum (especially for more volatile tokens such as CAKE & BANANA). This is to counter the risk of major price fluctuations (which are what’s most likely to cause a liquidation).
Once a vault has been created there are two ways you can adjust your ratio in order to decrease your risk of liquidation, both of which are accessible via the vault dashboard:
- Deposit more collateral into your vault
- Repay some of your MOR debt
Both these options increase the amount of collateral (in $ terms) relative to the amount of MOR you have borrowed, therefore increasing your liquidation ratio away from the minimum.
An additional benefit of MOR is that your capital is earning auto-compounding yield while you borrow, which is also increasing your collateralization ratio overtime (and reducing your liquidation risk) — however this is not enough to counter major price swings and should not be seen as an effective risk management strategy.