Liquidator Reward Percentage
The Liquidator Reward Percentage is the percentage of additional collateral assets awarded to the liquidator when they liquidate a loan position. It is intended to offset a liquidator’s costs, which include slippage, operational overheads, and other opportunity costs which liquidators must incur.
By far, slippage is the most significant and variable of these additional costs. The Liquidator Reward Percentage is set to be sufficient to cover the slippage costs which would result from all loans secured by a given collateral asset being simultaneously liquidated. As a result, we calculate the Liquidator Reward Percentage so that liquidators always find it profitable to liquidate loans and maintain platform solvency, even in the worst market conditions.
Conveniently, as detailed previously, the maximum slippage that all loans secured by a given collateral asset liquidated simultaneously could cause is limited to 5%, which is achieved due to the debt limit.
As a result, the Liquidator Reward Percentage can be set by simply adding a conservative factor to the slippage threshold of 5%. Initially, the Primary Lending Platform uses a conservative factor of 1.3x, which results in a Liquidator Reward of 6.5%. Given that a high Liquidator Reward Percentage is costly for borrowers if they are liquidated, as it is deducted from their collateral, it is necessary to ensure it is as low as possible without compromising platform stability.
As the debt limit for a given collateral asset is increased, the slippage that liquidating all such loans would result in also increases. Consequently, a higher Liquidator Reward Percentage is required to compensate liquidators for added slippage costs.