- What is Liquidation Bonus
When a liquidation occurs, a liquidator may repay some or all of an outstanding loan on behalf of a borrower and in return receive a discounted amount of collateral held by the borrower. This discount is defined as the Liquidation Bonus.
- How does Liquidation Bonus work
The Liquidation Bonus amount impacts users’ willingness to participate in liquidation, as well the benefits/losses of the liquidator/borrower.
If the Liquidation Bonus is too low, it will disincentivize users from participating in liquidation. Without a timely liquidation, the borrowed assets’ value may continue to rise. If the collateral assets cannot cover the borrowed assets, an insurance claim will be initiated, and the compensation will be paid out from user funds staked in the insurance pool. This could be perceived negatively by users and hinder the growth of the project.
If the Liquidation Bonus is too high, borrowers will lose more collateral assets when their positions are liquidated. Because of the fear of capital loss, borrowers will borrow less to avoid liquidation. The Wing reserves depend on the interest paid by borrowers. Less borrowing leads to fewer reserves for buybacks, which negatively impacts WING holders and the project.
So we need to have a reasonable Liquidation Bonus, it is important.
Now the Liquidation Bonus of stable coin is 5%, and for unstable coin, it is 8%, do you think it is reasonable?
How do you think? Feel free to have your say!