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.

As a result, Concordia adopts a dynamic liquidation approach where an optimal amount of rebalancing is calculated and approved for liquidation based on the market conditions. More information about this dynamic liquidation approach can be found here: https://medium.com/superp-fi/dynamic-liquidation-101-662233d1f545

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.