Liquidation Protection

Loanshark offers liquidation protection by automatically using user's assets staked in smart vault as additional collateral or to repay user's debt if his health ratio reaches a certain level.

Smart Vault

Funds deposited in the smart vault can be registered for liquidation protection if users have an outstanding loan on Loanshark. Loanshark offers single asset vaults with no impermanent loss. Each supported asset has its own vault and allows Loanshark to deploy the assets to optimal yield farming strategies. A strategy contains the logic for yield farming using allocated funds from a Loanshark vault. The goal of a strategy is to maximize the return of a selected vault’s asset.
Users can pre-set specific health ratio to trigger the action such that their funds in smart vaults be deposited to their borrowing position as additional collateral or to repay their existing loan. Loanshark use off-chain bots to monitor individual user positions with a recurrent periodicity and automatically deposits users' funds staked in single asset vaults as additional collateral or repay users' debt if the health ratio of that user reaches his pre-set level.
This is made possible because the vault contract holds all lending and borrowing positions. Loanshark uses a vault contract to represent the collective position of all users in a particular borrowing-lending pair. For individual user position, Loanshark protocol uses ERC1155 token to keep track of all deposits and borrow positions opened by all users.

Why Liquidation Protection?

Liquidation protection improves capital efficiency as overcollateralization can be kept to a minimum. When taking out a loan directly from lending platforms, borrowers often have to borrow with a low LTV to ensure that they do not get liquidated.
Borrowers are faced with a trade-off. While borrowing with a low LTV lowers the risk of getting liquidated, it bears the opportunity cost of not being able to allocate more borrowed funds elsewhere to earn higher yield.
With Loanshark, users can borrow at a high LTV and stake those additional funds at Loanshark single asset vault with a low risk of liquidation. The equation below demonstrates the gain in yield.
ΔY=C((SLSSDefault)+(LTVLS(VLSBLS)LTVDefault(VDefaultBDefault)))\begin{equation} \Delta Y= C \cdot ((S_{LS}-S_{Default}) + (LTV_{LS} \cdot (V_{LS}-B_{LS}) - LTV_{Default} \cdot (V_{Default}-B_{Default}))) \end{equation}
where Y = Extra Yield, C = Collateral , S = Supply APY (Loanshark/Default), LTV = Loan to value ratio (Loanshark/Default), V = Vault APY (Loanshark/Default) and B = Borrow APY (Loanshark/Default).