Lending, Collateral and Liquidations
Introduction
Lending protocols turn supplied assets, indexed interest, collateral prices, risk parameters, and liquidators into a state machine that must remain accountable through stress and insolvency.
Why It Matters
Healthy-path math can hide stale accrual, rounding drift, oracle manipulation, liquidity shortages, correlated collateral collapse, or bad debt that appears only after liquidation fails.
Mental Model
Track nominal balances through global indexes; value collateral/debt through explicitly bounded oracle data; define health and liquidation transitions; surface reserves and bad debt rather than assuming every position can be closed.
Questions This Branch Answers
- How do indexes update supply and debt without iterating users?
- When is liquidation allowed, bounded, and economically executable?
- Where does loss land when collateral or liquidity is insufficient?
Scope
Overcollateralized state machines, utilization/rates/indexes, LTV/health, liquidations, bad debt/reserves, isolated modes, debt ceilings, correlated risk, oracle dependency, and a local liquidator.
Out of Scope
Borrowing recommendations, unsecured credit, production risk parameter selection, regulatory advice, and claiming solvency from a single snapshot.
Dependencies
liquidity, oracle models, token decimals, fixed-point arithmetic, and stateful testing.
Candidate Note Roadmap
overcollateralized-lending-state-machine— Specify supply, borrow, repay, withdraw, and liquidation transitions.utilization-and-interest-indexes— Accrue aggregate interest with bounded precision and time assumptions.collateral-factors-ltv-and-health— Separate borrow limits, liquidation thresholds, and user health.liquidations-close-factors-and-bonuses— Bound seizure, repayment, incentives, and residual position state.bad-debt-insolvency-and-reserves— Make unrecoverable liabilities and loss allocation visible.isolated-collateral-debt-ceilings-and-emode— Contain asset-specific and correlated exposure.oracle-dependency-and-correlated-risk— Inject stale, manipulated, unavailable, and coupled prices.local-liquidator-and-invariant-suite— Exercise liquidations under latency, competition, and failure.
Future Project
A Collateralized Lending Market with indexed accounting, bounded parameters, explicit reserves/bad debt, a local liquidator service, and stateful economic invariants.
Initial Invariants
Indexes are monotonic under non-negative rates; healthy accounts cannot be liquidated; repayment cannot increase debt; liquidation respects close/seizure bounds and touches only declared collateral; insolvency is explicitly accounted.
Initial Threat Model
Oracle manipulation/staleness, precision accumulation, correlated price collapse, liquidity exhaustion, liquidation races, incentive failure, malicious tokens, parameter capture, and hidden bad-debt socialization.
Primary Sources
Maintained Aave/Compound specifications and implementations, oracle sources, and lending references listed in SOURCES.md.
Connects to: vaults, stablecoins, and risk monitoring.