Liquidations

Introduction

Liquidations may occur when your health factor drops below 1. We recommend taking a look at Aave article which covers details of liquidations in traditional lending protocols. This article will mostly focus on the process of liquidation of Uniswap V3 LPs.

Uniswap V3 LP liquidations

The way YLDR protocol accepts NFTs is by firstly wrapping them into ERC1155 token with big amount of shares. This is done to allow distributed ownership of an LP. In most of the cases you won't even notice it, because if you are not getting liquidated, you are keeping full ownership of your LP and it's just getting wrapped/unwrapped into familiar Uniswap ERC721-token.

However, if you are getting liquidated and liquidator pays off your debt, he has to get part of your collateral in exchange, that's when ownership distribution happens. Instead of getting full LP, he is just getting some part of it as ERC1155 shares, for example 10%. That way, he is able to withdraw 10% of all tokens+fees kept in this position, and user still keeps the other 90%.

Example 1. Ethereum price is considered to be 1000 USDC

Alice deposits Uniswap V3 LP with 500 USDC+0.5 ETH (worth 1000 USDC)

Alice position is getting wrapped into ERC1155 token with 1.000.000 supply. Currently Alice owns full supply

Alice borrows 500 USDC.

Ethereum price drops, Alice becomes eligible for liquidation

Liquidator Bob repays 250 USDC debt in exchange for 275 USDC worth of LP position tokens (550.000 shares)

Alice is left with 450.000 shares which she can redeem for 45% of WETH and USDC from position

Bob has 550.000 shares and is able to get the other 55% of funds from the position