Rebalancing (Liquidation)

Basic Concept of Rebalancing

A portfolio may be forcefully rebalanced if it has insufficient equity. Rebalancing a portfolio involves taking over a portion of its debt and collateral, with the effect of increasing its health.

A portfolio's health is a ratio of its total risk over its total collateral. To calculate total risk, the market value of its liabilities are summed and added to a quantity of risk. In this formulation, "risk" is just the required equity in a a portfolio -- that is, the value of collateral in excess of the value of liabilities.

$$HealthRatio = \frac {Liabilities + Risk} {Collateral}$$

For a portfolio to be considered "healthy", its total collateral value must be greater than its liabilities added to the portfolio specific amount of risk.

$$Collateral \gt Liabilties + Risk$$

Dynamic Close Rebalancing

The Concordia liquidation mechanism is one of the most vital components ensuring the protocol's health. Creating a successful liquidation mechanism must consider several primary concepts:

1. Preventing toxic debt

2. Ensuring adequately capitalized and decentralized liquidators

3. Other Design Factors.

*Note that neither is mutually exclusive and centered around incentives.

Terms

• Bounty: Also referred to as Liquidation Fee or Liquidation Spread. The discount is offered on collateral to liquidators to repay parts of the loan.

• Close-Factor: the maximum amount of debt that can be closed out and repaid in a single liquidation, eventually equal to 1 in the dynamic close outlined below.