Automatic Liquidations
Automatic liquidations, or auto-liquidation for short, are a loan type where the loan automatically defaults when the spot price of the asset drops below a pre-determined threshold.
On Cyan, there are two types of loans: Straight Loans, and Auto-Liquidation Loans. The major difference is how the loan defaults. In the case of a straight loan, the loan defaults when the user has failed to repay by the due date. In the case of an auto-liquidation loan, the loan defaults when the asset price drops below the risk threshold.
Pros and Cons of each type of Loan
Straight Loan Pros/Cons
The advantage of a straight loan is the ability to ignore the asset price during the loan duration. If the NFT rises or drops in price significantly, it does not affect the loan.
The disadvantage of a straight loan is the higher interest rate for the loan. For bullet straight loans, which have only one repayment to complete, the interest rate is discounted on an early repayment. However, if you repay a longer loan early, the interest rate is only slightly discounted for longer loans.
Auto-liquidation Pros/Cons
The advantage of an auto-liquidation loan is a much-reduced interest rate. This may be advantageous for loans with a shorter duration as the liquidity of your NFT is available for much cheaper than the straight loan.
The disadvantage of an auto-liquidation loan is the spot observation of the asset. This means, that if the price of the asset on loan drops by the amount of leverage taken out, or Loan-to-Value, then the loan defaults, and the asset is automatically liquidated.
How to select Auto-liquidation
In a new loan, make sure to select this toggle to turn on auto-liquidations. You can toggle the switch to compare the amount of interest you'll save!
Updated 4 months ago