Liquidations in Stacks Market V2
Limitations of Liquidations in V1
In v1, liquidation worked on an all-or-nothing basis. Once a position crossed its liquidation threshold, the protocol treated the entire position as unsafe and liquidated it in full.
There was no partial unwind, no buffer for market noise, and no opportunity for the user to intervene. A small price move could trigger a complete liquidation, creating sharp cliffs for users and forcing liquidators to absorb large, sudden positions
Liquidations Improvements in V2
V2 replaces the v1 model with a predictable liquidation curve defined by a slope from partial to full liquidation and an exponent that controls how quickly it accelerates.
This removes liquidation cliffs, makes outcomes more predictable, improves conditions for liquidators, and strengthens overall system stability.
Each collateral–debt pair now has a partial and a full liquidation threshold, giving users room to react. For example, with sBTC as collateral and USDC as the debt asset, partial liquidation begins at 70% LTV and full liquidation occurs at 75%. Penalties are no longer fixed; they move within a defined range to provide additional protection.
Liquidations Deep Dive
Liquidations are the safety mechanism that protects Zest Protocol from bad debt. When borrowers' positions become undercollateralized, liquidators can step in to repay debt in exchange for collateral at a discount, restoring the health of the protocol.
Understanding Position Health
Your position health is measured by your LTV ratio (Loan-to-Value):
Current LTV = Debt Value / Collateral Value × 100%As asset prices fluctuate, your LTV changes:
Collateral price drops or Debt asset price increases → LTV increases (worse health)
Collateral price rises or Debt asset price drops → LTV decreases (better health)
Three LTV Thresholds
Each Risk Group defines three critical LTV thresholds that determine position status:
1) LTV-BORROW (Borrowing Threshold)
Purpose: Maximum LTV for healthy borrowing operations.
It controls new borrow requests, collateral withdrawal requests, adding new debt types
2) LTV-LIQ-PARTIAL (Partial Liquidation Threshold)
Purpose: Point at which partial liquidation becomes allowed.
Position is unhealthy but not critically so liquidators can just repay portion of debt with the goal to restore position to healthy status. Liquidator receives minimum penalty bonus (5%)
3) LTV-LIQ-FULL (Full Liquidation Threshold)
Purpose: Point at which complete position clearing becomes allowed.
What It Means:
Position is severely undercollateralized
Liquidators can clear the entire position
Liquidator receives maximum penalty bonus (e.g 10%)
Higher urgency to protect protocol from bad debt
Different groups have different buffers between the three LTV thresholds with conservative groups have tighter buffers while less volatile groups have wider buffers.
Graduated Liquidation Penalties
V2 introduces dynamic penalties that scale based on position health rather than fixed liquidation bonuses. The penalty formula is the following:
Dynamic penalties make liquidation progressive: once the partial liquidation threshold is crossed, the share of the position that can be liquidated and the liquidaiton penalty increases as LTV approaches the full liquidation threshold.
For example, with partial liquidation at 85% LTV and full liquidation at 95% combined with a 5% min penalty and 10% of max penalty, reaching 90% LTV allows roughly 50% of the position to be liquidated with a 7.5% penalty, with the allowable portion scaling upward between those bounds.
Why Graduated Penalties?
Smoother Liquidations: Positions closer to healthy status receive smaller penalties, encouraging early intervention.
Risk-Appropriate Rewards: Liquidators taking on riskier positions (higher LTV) receive larger bonuses.
Reduced Borrower Impact: Borrowers whose positions are just barely liquidatable lose less to liquidation penalties.
Market Efficiency: Creates continuous incentive gradient rather than cliff effects at fixed penalty levels.
Summary
Zest V2's liquidation system provides sophisticated risk management through:
Three-tier thresholds: Borrow, Partial, Full create safety buffers
Graduated penalties: 5-10% scaling based on position health
Partial liquidations: Restore positions to healthy status when possible
Full liquidations: Clear critically undercollateralized positions
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