Structured Product Liquidation in crypto finance refers to the automated process where underlying assets collateralizing a complex financial instrument are sold or repossessed to cover outstanding debts or losses. This action is typically triggered when predefined conditions are met, commonly observed in decentralized lending protocols or options vaults.
Mechanism
The mechanism is frequently managed by smart contracts, which continuously monitor collateralization ratios against predetermined liquidation thresholds. Should the collateral’s value fall below a specific percentage of the borrowed amount, or other terms are breached, the smart contract automatically initiates the sale of the collateral to repay the debt, often with an associated penalty fee.
Methodology
Managing structured product liquidation involves designing robust oracle systems for accurate price feeds, setting appropriate liquidation ratios to balance risk and capital efficiency, and implementing efficient auction or automated market operations for collateral disposal. The objective is to minimize bad debt for lenders and provide transparent, predictable rules for borrowers within the decentralized financial ecosystem.
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