Liquidation Risk
Borrowing on Fira, whether in fixed-maturity (“fixed-rate”) or floating-rate markets, requires collateral and therefore carries a material risk of liquidation. Liquidations may occur rapidly, automatically, and without notice, and can result in the partial or total loss of your collateral, especially during volatile or stressed market conditions. This disclosure is not exhaustive and should be read together with Fira’s broader risk disclosures and protocol mechanics.
1) Description of the Risk
Collateralized positions and LTV/LLTV thresholds
To open and maintain a borrowing position, users post collateral and borrow against it. At origination, borrowers choose an initial Loan-to-Value (LTV). Each market defines a Liquidation Loan-to-Value (LLTV) threshold. A position’s “health” is determined by comparing (i) the market value of the collateral to (ii) the value of the outstanding debt, using protocol-defined pricing sources, risk parameters, and accounting rules.
Fixed-maturity borrowing mechanics
In fixed-maturity markets, borrowers typically borrow BT and may swap it into the underlying borrowed asset. For liquidation accounting purposes, BT may be treated as 1:1 with the underlying borrowed asset (i.e., valued at par) to reduce reliance on secondary market BT pricing. This does not eliminate liquidation risk and does not guarantee that exits, swaps, repayments, or liquidations will occur at favorable prices.
When a position becomes liquidatable
If a borrower’s LTV exceeds the LLTV, commonly due to:
a decline in collateral value,
an increase in the value of the borrowed asset,
changes in volatility or risk parameters,
oracle/pricing dynamics, delays, or failures, the position becomes eligible for liquidation.
Liquidation process and outcomes
When liquidatable, third-party liquidators (or liquidation mechanisms) may repay part or all of the debt in exchange for seizing a corresponding amount of collateral, subject to protocol-defined rules (which may include liquidation bonuses/discounts, close factors, fees, and other parameters). Depending on severity and conditions, liquidation may be partial or full.
2) How This Risk Can Materialize (Illustrative Scenarios)
Fast market moves: Sharp collateral drawdowns or rapid increases in the borrowed asset can push LTV above LLTV before you can react.
Liquidity stress: Even if you intend to repay, you may face slippage, thin liquidity, or unfavorable pricing when swapping assets to repay debt.
Network congestion: During congestion, transactions to add collateral or repay may be delayed, fail, or become prohibitively expensive, allowing liquidation to occur first.
Oracle or pricing disruptions: Delays, outages, or mispricing can lead to sudden health factor deterioration, triggering liquidation.
Cascading liquidations: Broader market stress may lead to simultaneous liquidations, worsening execution and increasing the likelihood of full liquidation.
Liquidations can therefore occur with little or no warning, and may involve unfavorable execution under stressed conditions.
3) Mitigations (User Actions) and Important Limitations
Fira may provide interface tooling and mechanisms intended to help manage liquidation risk. These are not guarantees. You may still be liquidated and lose collateral.
Use conservative leverage at origination: Starting with a lower LTV creates a larger buffer, but requires more collateral and does not prevent liquidation in severe moves or under oracle/network failures.
Monitor and maintain collateralization: You can attempt to reduce risk by adding collateral or repaying debt, but you may not be able to transact in time; execution may be delayed or costly; market conditions may deteriorate faster than you can respond.
Deleverage via partial repayment: Repaying part of the debt can reduce LTV, but may require selling assets during stress, incurring fees/slippage, and may be constrained by available liquidity.
Interface metrics are indicative only: Displayed LTV ranges, health factors, and warnings are informational and may be delayed, inaccurate, or incomplete. You are responsible for independently assessing your risk and monitoring your position.
Automation (if introduced) is not reliable protection: Automated deleveraging or other automation features may fail, trigger unexpectedly, perform poorly under stress, or be unavailable, and do not eliminate liquidation risk.
4) Key Takeaway
Liquidation risk is inherent to collateralized borrowing. Do not assume you will be able to add collateral, refinance, or repay in time, especially during extreme market conditions. Use Fira only if you fully understand liquidation mechanics and can bear the risk of losing some or all of your collateral.
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