Liquidation

On UncleSam Finance, liquidations are triggered when a borrow position falls below the collateral factor threshold. Collateral factors determine the initial borrowing capacity for each asset.

If a borrower's position drops below the collateral factor limit, they become eligible for liquidation. Liquidators (bots, contracts or users) can call the liquidate function which seizes the borrower's collateral.

The value of the seized collateral, minus a liquidation penalty, is returned to the borrower in the protocol's base asset. The borrower's debt is eliminated and they typically have an excess balance from the collateral value.

Each liquidation is paid for from UncleSam Finance's reserves. In return, the protocol receives the collateral asset. If reserves drop below the target level, liquidators can purchase collateral at a discount to replenish reserves.

This system maintains healthy collateral ratios across UncleSam Finance lending pools on Base Chain. Borrowers are incentivized to manage risk exposure, while liquidators earn profits for maintaining protocol health.