Liquidation Engine
Dualis Finance employs a graduated, four-tier liquidation system designed to protect protocol solvency while giving borrowers multiple opportunities to restore their positions before full liquidation occurs. This institutional-grade approach minimizes unnecessary value destruction and reduces cascading liquidation risk.
Four-Tier Liquidation System
Unlike protocols that liquidate a fixed percentage at a single threshold, Dualis progressively increases the severity of liquidation as a position's health factor deteriorates. Each tier triggers a proportionally larger liquidation, providing natural stopping points where a borrower can intervene.
| Tier | Health Factor Range | Position Liquidated | Description |
|---|---|---|---|
| Margin Call | 0.95 – 1.00 | 0% | Warning phase only. The borrower receives alerts through the UI, WebSocket notifications, and email. No collateral is seized. The borrower should add collateral or repay debt. |
| Soft Liquidation | 0.90 – 0.95 | 25% | A quarter of the debt position is liquidated. This is designed to nudge the health factor back above 1.0 with minimal disruption to the borrower's overall position. |
| Forced Liquidation | 0.85 – 0.90 | 50% | Half the position is liquidated. At this stage, the position represents meaningful risk to the protocol and requires aggressive remediation. |
| Full Liquidation | < 0.85 | 100% | The entire position is liquidated. All collateral is seized and sold to cover outstanding debt. Any remaining value after debt repayment and penalty deduction is returned to the borrower. |
Credit Tier Alert Thresholds
Different credit tiers receive health factor alerts at different thresholds. Higher-tier institutions receive earlier warnings, reflecting their larger position sizes and the protocol's expectation that they will manage risk proactively:
| Credit Tier | Warning Alert | Danger Alert | Critical Alert |
|---|---|---|---|
| Diamond | HF ≤ 1.30 | HF ≤ 1.20 | HF ≤ 1.10 |
| Gold | HF ≤ 1.40 | HF ≤ 1.30 | HF ≤ 1.15 |
| Silver | HF ≤ 1.50 | HF ≤ 1.35 | HF ≤ 1.20 |
| Bronze | HF ≤ 1.60 | HF ≤ 1.40 | HF ≤ 1.25 |
| Unrated | HF ≤ 1.80 | HF ≤ 1.50 | HF ≤ 1.30 |
Diamond-tier institutions, with their established risk management capabilities, receive warnings closer to the liquidation boundary (1.30), while Unrated users receive warnings much earlier (1.80) to account for less sophisticated risk management practices.
Liquidation Penalties by Asset
The liquidation penalty is the premium paid on seized collateral. It serves two purposes: compensating liquidators for execution risk and discouraging borrowers from operating near liquidation thresholds.
| Asset | Liquidation Penalty | Rationale |
|---|---|---|
| USDC | 4% | Low volatility, deep liquidity, minimal execution risk |
| T-BILL (RWA-TBILL) | 3% | Government-backed stability, extremely low default risk |
| wETH / ETH | 5% | Moderate volatility with strong liquidity |
| wBTC | 6% | Higher value per unit with moderate volatility |
| CC (Canton Coin) | 5% | Canton Network native asset with growing liquidity |
| TIFA-REC | 10% | Illiquid asset class with counterparty risk and longer settlement |
Protective Mechanisms
The Dualis liquidation engine includes several mechanisms designed to protect both borrowers and the protocol from adverse outcomes:
Graduated Execution
By liquidating only the minimum necessary at each tier (25% at soft, 50% at forced), the protocol avoids over-liquidation. After a partial liquidation, if the health factor recovers above the tier boundary, no further action is taken. This preserves borrower equity whenever possible.
Margin Call Buffer
The margin call zone (HF 0.95–1.00) provides a critical window where borrowers are warned but no collateral is seized. This is particularly valuable for institutional borrowers who need time to execute treasury operations, obtain internal approvals, or move assets across chains.
Bad Debt Socialization
In the rare event that a liquidation does not fully cover outstanding debt (e.g., during extreme market volatility), the shortfall is absorbed first by the protocol reserve fund, then by a governance-controlled insurance pool. Suppliers are not directly exposed to bad debt unless both buffers are exhausted.
Oracle Circuit Breakers
Price oracle feeds include circuit breaker logic that pauses liquidations if a price deviation exceeds configurable bounds within a short time window. This prevents liquidations triggered by oracle manipulation or flash crashes.
Liquidation Cooldown
After a partial liquidation (soft or forced), a brief cooldown period prevents immediate re-liquidation of the same position. This gives the borrower time to react and add collateral before the next evaluation cycle, reducing the risk of cascading liquidations during rapid market movements.