How To Not Get Liquidated (Common Sense Approach)

What if I get LIQUIDATED?

This is a common question we get.

And although the fear is unwarranted, it’s understandable.

Liquidation has a severe connotation in finance, and an even bigger one in the PulseChain community. 

But once you understand how liquidations work in Liquid Loans, and this simple strategy to avoid them, you won’t fear anymore. 

How Do Liquidations Work?

To ensure that the entire stable asset supply remains overcollateralized by PLS value, Vaults that fall under the minimum collateral ratio of 110% are subject to being closed (liquidated).

The debt of the Vault is canceled and absorbed by the Stability Pool, and its collateral is distributed among the Stability Providers.

The owner of the Vault still keeps the full amount of USDL borrowed but loses ~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 150%.

The reason why the fear exists is because typically users total value goes to $0.00 when margin or leverage trading on exchanges. 

But in Liquid Loans, users only lose a maximum of 10% of their total value. 

For example, if a user is liquidated with $10,999 worth of PLS, they lose the PLS but keep 10,000 USDL. This is far from a liquidation to zero. 

But regardless, nobody wants to lose 10% instantly, so do this to avoid liquidation.

How To Avoid Liquidations

1. Choose a High Collateral Level. If you choose a collateral ratio of 110%, you are betting that the price of $PLS will go up from that point and never go below it ever again. Rather, it is safer to choose a collateral level of AT LEAST 150% to give you enough time to repay your debt in a downturn.
2. Keep Your USDL in the Stability Pool. If you don’t do anything with your USDL (like gamble it away) you will always have enough value to repay your debt and avoid liquidation. The Stability Pool is a great place to park it in the meantime.
3. Pay Attention to Your Collateral Level. If you simply pay attention, you can see when you are approaching 110%. Even in crypto a 50% drop in a day is extremely rare. If your collateral level is above 150%, then you will have plenty of time to repay your debt.
4. Have Other Liquid Funds. If you have other funds such as PLSX, LOAN, or another stable, you can swap those for USDL and repay your debt. But, if you did something else with your USDL, and have no other funds to buy more and repay your debt, you are at the mercy of the markets. 

The Bottom Line

Liquidations are a scary term, but investing emotionally is a time-tested strategy to getting rekt.

If you understand liquidations and how to avoid them, the fear dissipates. 

P.S. Just keep your USDL in the Stability Pool and monitor your vault. That way you’ll always have access to it if you need to repay your debt and you’ll earn yield while waiting.