# Liquidations

<figure><img src="/files/UQWcocpAyCoLpyzSw1bg" alt=""><figcaption></figcaption></figure>

## Health Factor

Liquidations are determined by the borrower’s health factor, which is calculated using the following formula:

$$
Health Factor = \frac{Collateral Value \times  Weighted Average Liquidation Threshold}{Borrow Value}
$$

> **Example**\
> Liquidation threshold: 50%
>
> Collateral: $100,000
>
> Borrow position: $40,000
>
> → Health factor = ($100,000 \* 50%) / $40,000 = 1.25

When a borrower’s debt position falls below a health factor of 1, it enters the liquidation process. Liquidations on RAAC work differently than traditional DeFi lending protocols due to the borrower’s collateral being $iREET instead of a fungible token with a liquidity pool.

The liquidation threshold is set per RWA collateral asset, based on its risk profile. The liquidation threshold acts as a buffer to prevent bad debt from accumulating in the RAAC ecosystem.<br>

***

## Liquidation Process

A borrower’s RWA collateral value (in crvUSD) is updated regularly based on Chainlink price feeds and an off-chain evaluation twice a year.

When a borrower’s health factor falls below 1, a liquidation event is triggered

{% hint style="info" %}
If the borrower took out an optional Liquidation Guard, the borrower may repay their loan within 72 hours to avoid liquidation.
{% endhint %}

{% stepper %}
{% step %}

### REET NFT Transfer

Upon liquidation, the stability pool pays the bad debt to make the lending pool whole. The stability pool receives the REET NFT.
{% endstep %}

{% step %}

### iREET deposit & usage

The stability pool then deposits the RWA NFT into the RWA index, receiving $iREET index tokens in exchange. $iREET is used as follows:

* 75% are swapped to crvUSD via the $iREET/crvUSD LP and used to reimburse the stability pool Given the 60% LLTV, the reward would be \~15% dependent upon the price impact of the swap
* 20% is distributed to $iREET/crvUSD LPs as a reward
* 2.5% is allocated to the RAAC treasury as a protocol fee
* 2.5% is burned, accruing value to the RWA index, and therefore $iREET holders
  {% endstep %}
  {% endstepper %}

If the $iREET/crvUSD liquidity is insufficient to repay the entire crvUSD debt, the DecrvUSD stability module will socialize the loss within the stability module. The RcrvUSD deployed in the stability module is burned to make the system whole.

The borrower keeps their loaned crvUSD but loses ownership of the REET NFT, realizing a loss of $$collateral value - borrowed amount$$

The whole debt position is liquidated.

> In a worst case scenario, when the liquidation of the collateral cannot happen due to an insufficient stability pool and $iREET-crvUSD liquidity pool, the liquidation is reverted. The position will stay under liquidation, the protocol is paused to prevent malicious withdrawals, and the required capital is sourced to enable an efficient liquidation.

## Parameters

Currently, the following parameters are implemented:

| Parameter | Value |
| --------- | ----- |
| LLTV      | 60%   |
| Max LTV   | 50%   |


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