Liquidations
Stormbit operates on a fundamentally different liquidation model compared to typical DeFi lending protocols: there are no intraloan liquidations during the loan term because all loans are fixed term. Liquidation only takes place at the end of the loan term or after a grace period if the borrower does not repay.
Key Features of Stormbit Liquidation Model
Fixed-term loans: Loan duration is predefined, and liquidation is deferred until maturity or loan end.
No forced sales or margin calls before term end: Borrowers have certainty without risk of mid-loan liquidation cascades.
Collateral value risk absorbed by lenders during loan term: Lenders price upfront volatility risk through the premium paid by borrowers.
Liquidation triggers only on default at loan maturity or after grace period: If borrower fails to repay the debt plus interests, liquidation applies.
Liquidation Process
Default detection: At or after loan maturity, if borrower fails to repay, the loan is marked for liquidation.
Collateral seizure: The protocol seizes a predefined portion of collateral (e.g., 0.8 BTC) plus an added liquidation fee (e.g., 0.02 BTC) to cover the debt and generate incentive for liquidation.
Distribution: Protocol distributes seized collateral (or stablecoin equivalent) proportionally to lenders, recovering principal and fee.
Excess collateral: Any collateral not seized beyond the required amount is returned to the borrower.
Bad debt scenarios: If collateral value is insufficient to cover the loan, losses are absorbed by the insurance fund or shared pro-rata among lenders.
Advantages of Stormbit’s Liquidation Approach
Capital efficiency: Borrowers can borrow higher LTVs due to upfront premium and absence of mid-term liquidations.
Fair risk transfer: Lenders bear collateral price risk during term but are compensated via premiums and have control over risk management.
Slippage reduction: Liquidation happens in controlled fashion with auction or direct collateral distribution, minimizing market impact.
Clear end-of-term settlement: Final loan resolution is transparent and predictable for all parties.
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