Liquidations are a core risk-management mechanism in Polyester’s lending system. Because all borrowing is overcollateralized, each position must maintain sufficient collateral value relative to its debt.
When a position no longer meets these requirements, liquidation is triggered automatically by the protocol. This process protects suppliers from defaults and keeps lending pools solvent.
When a Position Becomes Liquidatable
Each borrowing position on Polyester is evaluated using a health factor, which compares the risk-adjusted value of collateral to the value of outstanding debt.
The health factor is defined as:
Health Factor = (Collateral Value × Liquidation Threshold) ÷ Debt Value- HF ≥ 1.0 indicates a healthy position
- HF < 1.0 means the position becomes eligible for liquidation
Once the health factor drops below 1.0, the position can be liquidated by the protocol.
What Causes the Health Factor to Drop Below 1.0
A user's health factor decreases when the relationship between collateral value and debt value deteriorates. This can happen through several protocol-level mechanisms:
Collateral price decreases If the market price of collateral falls, the total collateral value used in the health factor calculation decreases. Because the liquidation threshold is applied to this value, even moderate price declines can materially reduce borrowing safety.
Borrowed asset price increases If the borrowed asset appreciates relative to the collateral, the total debt value increases, raising the denominator of the health factor calculation.
Interest accrual on borrowed assets Borrowed positions accrue interest continuously via the borrow index. Over time, accrued interest increases total debt. Even without any price movement, this alone can push a position below the liquidation threshold.
All health factor evaluations are deterministic and based on current prices, accrued interest, and on-chain configuration parameters.
Example scenario:
A user supplies $10,000 worth of ETH as collateral.
- Collateral factor: 85%
- Effective collateral value: $8,500
The user borrows $8,000 USDT.
Initial state:
- Debt value: $8,000
- Health Factor: $8,500 ÷ $8,000 = 1.0625 (healthy)
Over time, interest accrues on the borrowed USDT and the total debt increases to $8,600.
Updated state:
- Debt value: $8,600
- Health Factor: $8,500 ÷ $8,600 = 0.988
At this point, the health factor drops below 1.0 and the position will need to be partially liquidated to restore solvency if the user doesn’t make an interest payment or add more collateral.
How the Liquidation Process Works
When a position’s health factor falls below 1.0, it becomes eligible for liquidation by any participant acting as a liquidator.
Liquidators monitor the system for undercollateralized positions and initiate liquidation by calling the protocol’s on-chain liquidation function. This function validates the position’s current health factor, verifies pricing inputs, and enforces all risk parameters before execution.
During liquidation, the liquidator repays a portion or all of the borrower’s outstanding debt. In exchange, the protocol transfers a corresponding amount of the borrower’s collateral to the liquidator at a predefined discount. All calculations and transfers occur within a single atomic transaction.
Partial vs Full Liquidations
Polyester supports both partial and full liquidations.
- Partial liquidations allow large or complex positions to be unwound incrementally, reducing risk without unnecessarily liquidating excess collateral.
- Full liquidations may occur when a position is small enough or when a liquidator chooses to repay the entire outstanding debt in one action.
Both approaches are valid and enforced by the same protocol rules. Which occurs depends on position size, market conditions, and liquidator decision.
What Happens to Assets During Liquidation
During a liquidation:
- All or a portion of the borrower's debt is repaid by the liquidator
- A corresponding portion of their collateral is seized and given to the liquidator
- Any collateral remaining after their health factor goes back above 1.0 belongs to the borrower
Liquidator Incentives and Protocol Fees
Liquidators are incentivized through a predefined liquidation bonus, which compensates them for providing capital and executing the liquidation. See Liquidation Fees.
In addition, the protocol may collect a small fee during liquidation events.
How to Reduce Liquidation Risk
Liquidation risk is determined by a borrower's health factor. As long as it remains above 1.0, their position cannot be liquidated.
Risk can be reduced in two ways.
- Adding collateral increases the borrowing buffer and raises the health factor immediately.
- Repaying borrowed assets lowers outstanding debt and improves position health.
Health factor updates are reflected throughout the lending interface so borrowers can adjust their position before liquidation thresholds are reached.