Protocol
Liquidation flow
One liquidation, step by step: checks, repayment, seizure, and the edge cases.
This page follows one liquidation, from the moment a loan crosses its threshold to the moment the collateral sits in the warehouse. It covers the checks the pool runs, the arithmetic of the bonus, and the cases where the pool does less than the full liquidation, or nothing.
When a loan is liquidatable
The lending market decides, not Blotter. In a Morpho Blue-style market, each market has a liquidation loan-to-value (LLTV). Anyone can liquidate a loan once its debt exceeds that fraction of its collateral value at the oracle price.
LTV = debt ÷ (collateral × oracle price)liquidatable when LTV > LLTV
The pool cannot liquidate a healthy loan. If the condition is false, the lending market rejects the call.
Eligibility checks
Before it spends any USDG, the pool runs four checks of its own. All four must pass.
| Check | Question | If it fails |
|---|---|---|
| Loan status | Is the loan liquidatable on the lending market now? | Nothing to do |
| Feed freshness | Is the oracle price within its heartbeat? | No seizure |
| Inventory caps | Would the seized tokens keep the warehouse under the ticker and sector caps? | Reduced to the room left, or skipped |
| Withdrawal reserve | After repayment, is free USDG still above the reserve? | Reduced to the USDG available, or skipped |
The freshness check deserves a note. A stale price can make a loan look liquidatable when it is not, or make collateral look more valuable than it is. Either way the pool would pay the wrong price for inventory. The cost is real: if a feed breaks during a fast market, the pool stands aside exactly when it is wanted. See Guardrails and parameters.
Repay and seize
If the checks pass, the pool calls the lending market's liquidation function. In one transaction:
- The pool transfers USDG to the lending market to repay part or all of the debt.
- The lending market transfers collateral to the pool, worth the repaid amount plus the liquidation bonus, at the oracle price.
- The seized Stock Tokens are recorded in the warehouse at the oracle price.
seized tokens = repaid × (1 + bonus) ÷ oracle priceentry price = oracle price ÷ (1 + bonus)gross premium = seized tokens × oracle price − repaid = repaid × bonus
The bonus is a parameter of the lending market, not of Blotter. The pool receives the same bonus as any other liquidator.
Example (hypothetical numbers). A loan has 8,000 USDG of debt and 100 Stock Tokens of collateral. The market has an LLTV of 80% and a bonus of 5%. The oracle prints 95. Collateral is worth 9,500, the LTV is 84.2%, and the loan is liquidatable. The pool repays 8,000 USDG and seizes 8,000 × 1.05 ÷ 95 = 88.42 tokens, worth 8,400 at the oracle. The gross premium is 400 USDG. The other 11.58 tokens stay with the borrower. The 400 is not a realized gain: it becomes one only if the tokens later sell for more than 8,000 in total.
Partial liquidation when capacity is short
Morpho Blue-style markets let the liquidator choose how much debt to repay. The pool uses this. On a given loan it repays the smallest of four quantities:
- the debt of the loan,
- the free USDG above the withdrawal reserve,
- the room left under the ticker cap, converted to a repayment amount,
- the room left under the sector cap, converted the same way.
When one of the pool's own limits binds, the loan is partially liquidated. Its LTV improves, and it may or may not return under the LLTV. The pool does not reserve the remainder for itself.
What happens to the overflow
Whatever the pool cannot absorb stays liquidatable on the lending market, open to ordinary liquidators exactly as today. They repay, seize and sell on the AMM. Blotter reduces the volume dumped at the print. It does not remove it. If the pool is small compared with the wave, most of the wave still reaches the AMM, and the pattern in The Monday problem still applies to that part.
When collateral is worth less than the debt
After a large gap, a loan's collateral may no longer cover its debt plus the bonus. A liquidator can then seize all the collateral, but what it repays is capped by the collateral's value after the bonus.
repaid = collateral × oracle price ÷ (1 + bonus)shortfall = debt − repaid
Example (hypothetical numbers). Same loan, but the oracle prints 78. Collateral is worth 7,800, less than the debt of 8,000. The pool seizes all 100 tokens and repays 7,800 ÷ 1.05 = 7,428.57 USDG. A debt of 571.43 USDG remains with no collateral behind it.
The pool still receives its bonus here, because it still buys collateral below the oracle price. What it does for lenders is narrower: by liquidating at the print instead of after a backlog, it limits how much further a loan can deteriorate before it is closed.
After the seizure
The tokens are now inventory. They are valued at the oracle price in the pool's total assets, they count against the ticker and sector caps, and they wait for the next window in which unwinding is allowed. See Warehouse and unwinding.