Liquidations

When a user mints a pAsset, they do so against pETH collateral. If the value of that collateral falls too far relative to the debt, the position can fall below the protocol’s Minimum Collateral Ratio of 115% and become eligible for liquidation.

Liquidations protect the solvency of each pAsset market by closing unsafe positions before they create losses for the wider system.

Liquidation Process

Each pAsset market has its own Earn Vault, which acts as the first line of defense during liquidations. Depositors supply the pAsset to the Earn Vault, and those deposits can be used to cancel the debt of liquidated positions.

When a liquidation occurs, the position’s debt is cancelled using pAssets from the Earn Vault, while the corresponding pETH collateral is transferred to the vault. Earn Vault depositors therefore receive liquidation gains in exchange for acting as the first backstop for the market.

This liquidation mechanism is one source of protocol-native yield distributed to Earn Vault depositors and is explained in greater detail in the dedicated Earn Vault section.

Fallback Redistribution

If the Earn Vault does not hold enough deposits to absorb the entire liquidation, the remaining debt and collateral are redistributed across the other open positions in the same pAsset market. As such, liquidations are always processed entirely within the protocol without relying on external auctions or discretionary intervention.

Redistribution assigns each open position a proportional share of both the remaining debt and collateral. While intended only as a fallback mechanism, it ensures that liquidations can always occur even when the Earn Vault is temporarily unable to absorb the full position.