Liquidation
Overview
Stormbit's liquidation model differs fundamentally from traditional DeFi: liquidation only happens at maturity, never during the loan term. There are no intraloan liquidations because all loans are fixed-term. Liquidation is a settlement event, not a punishment.
This means borrowers have certainty throughout the loan duration. A 50% collateral price crash triggers nothing—the loan remains protected until maturity. If the borrower repays on time, they receive all collateral back regardless of price fluctuations during the term.
Traditional vs Stormbit
Traditional protocols force liquidation during price crashes—exactly when selling is worst. Borrowers lose collateral plus penalties, and cascading liquidations amplify market stress. Stormbit borrowers have until maturity to repay, allowing time for market recovery.
See comparison for detailed differences.
When Liquidation Occurs
The only trigger is default at maturity: the loan matures and the borrower doesn't repay. No matter what happens to collateral price during the term—50% drops, flash crashes, market manipulation—the position remains protected.
Loan allocated
Active
None
During term
Active
None (protected)
At maturity
Expired
Auction eligible
Auction purchased
Liquidated
Collateral transferred
Auction Mechanism
Stormbit uses a declining price auction for defaulted loans. The auction starts at full debt value and the price declines over time to attract buyers. The first buyer to accept the current price wins the collateral.
This mechanism eliminates MEV extraction since there's no advantage to front-running a declining price. Market participants compete on willingness to accept price, not transaction speed.
Fee Absorption
When auction proceeds fall short of expected repayment, losses are absorbed in a specific order designed to protect lender principal:
Protocol fees absorbed first
Lender fees absorbed second
Net interest absorbed third
Principal takes remaining loss
This structure means fees act as a buffer. Only severe shortfalls impact depositor capital.
Emergency Provisions
After the standard auction window, security measures can activate to handle edge cases: auctions with no buyers, module malfunction, or emergency situations. When the contract is paused, authorized parties can withdraw stuck funds and return assets to appropriate parties.
Trade-offs
Stormbit's model shifts risk from borrowers to lenders. Lenders have no mid-term protection against collateral decline, but they're compensated through higher premiums and have access to hedging tools. Borrowers pay higher rates but gain certainty—no monitoring required, no MEV extraction, and time for markets to recover from temporary crashes.
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