How do Liquidations Work?
We want to avoid these!
Liquidations typically occur at Collateralization ratios of 125% or lower, but this can change from contract to contract, so be sure to check before minting!
The value of the collateral in the smart contract is continually monitored off-chain by a robust network of Liquidators. Liquidators continuously monitor if a position is properly collateralized by referencing off-chain price feeds. Liquidations can be configured to automatically search for positions to liquidate (through Liquidation Bots) or manually by anyone holding the synthetic asset and collateral currency of the position they are liquidating. Liquidators are incentivized with rewards to identify and liquidate undercollateralized positions. If a position is liquidated by a liquidator bot there will be a 2-hour delay before the liquidation is finalized.
During the 2-hour delay, Disputers are incentivized to monitor contracts using UMA’s priceless financial contracts. Similar to Liquidators, Disputers can be in the form of a Dispute Bot or executed manually. Disputers reference their own off-chain price feeds to determine if a liquidation was valid or invalid. If invalid, the dispute bot will dispute the liquidation which will call UMA’s oracle known as the Data Verification Mechanism (DVM). The liquidated position will be pending until it is resolved by the DVM (48 hours later). Contracts that wish to receive a price faster than 48 hours can use UMA's Optimistic Oracle.
The DVM will resolve the dispute by proposing a vote to UMA Tokenholders to obtain the price of the asset at a given timestamp. UMA Tokenholders will reference off-chain price feeds to report price information to the DVM. The DVM will aggregate UMA tokenholder votes and report the price of the asset on-chain.
If the Disputer was correct, the DVM will reward the Disputer and the Token Sponsor of the effected position. If the Liquidator was correct the DVM will reward the Liquidator, penalize the Disputer, and the Token Sponsor will lose the funds in their position. https://docs.umaproject.org/getting-started/how-uma-works