Liquidation

For each loan market, liquidation can be triggered when Borrow Limit Used exceeds 100%.

Borrow Limit Used = Outstanding Debt in USD/ Borrow Limit in USD x 100%

Borrow Limit of certain market = Σ Amount of Collateral i x Price of Collateral i x Collateral Factor of Collateral i

At Paddle, anyone can participate in liquidations directly through the frontend to help maintain the stability and integrity of the platform.

When a borrower's position becomes undercollateralized, the liquidation process begins. Liquidators can repay a portion of the borrower’s debt and, in return, claim the borrower’s NFT collateral.

To protect users, Paddle uses a partial liquidation model. This means the process will automatically stop once the borrower's debt drops back below his Borrow Limit. This prevents the borrower from losing their entire position and gives them a chance to recover.

Liquidation Price and Process

$$Liquidation Price = Price Index *0.7$$

To seize an NFT, a liquidator pays 70% of the NFT’s current Price Index. They can continue repaying debt and claiming NFTs until the position becomes healthy again.

Here is an example:

Let’s say Alice uses her NFTs to borrow from the Steady Teddys / BERA lending market.

Initial Setup:

• Alice deposits 2 Steady Teddys as collateral:

  • Teddy #8024

  • Teddy #8795

• Price Index per Teddy: 100 BERA

• Collateral Factor: 50%

• Total Borrow Limit: → 100 (price) × 2 (NFTs) × 0.5 = 100 BERA

• Alice borrows 90 BERA

✅ At this point, her position is healthy.

Market Change:

• The Price Index drops to 85 BERA

• New Borrow Limit = 85 × 2 × 0.5 = 85 BERA

• Alice’s debt remains at 90 BERA

⚠️ Now, her debt exceeds the borrow limit, triggering liquidation.

Liquidation Process:

• Bob (a liquidator) steps in to help repay Alice’s debt.

• He chooses to seize Teddy #8024

• Liquidation Price = 85 (price index) × 0.7 = 59.5 BERA

Bob pays 59.5 BERA to the protocol, receives Teddy #8024, and helps reduce Alice’s debt.

Updated Position:

• Remaining Collateral: 1 Teddy (#8795)

• New Borrow Limit = 85 × 1 × 0.5 = 42.5 BERA

• Remaining Debt = 90 – 59.5 = 30.5 BERA

✅ Now Alice’s borrow limit (42.5 BERA) is greater than her debt (30.5 BERA), so liquidation ends automatically.

Overpayment Scenario

If liquidation continues and only one NFT is left, a liquidator may repay more than the borrower's total debt to claim the NFT. In such cases, the excess amount is not returned but is instead allocated to the protocol reserve, supporting community incentives such as $PADD staking rewards and BGT emission bribes.