An open USB position must always be capitalized above the Liquidation Threshold, i.e., Collateral Value * LVR. Loans that fall below the Liquidation Threshold may be subject to liquidation. Liquidators repay the loan and receive a greater portion of the position's collateral in return. A liquidation event incurs a Liquidator Fee, which varies for each collateral type.
As an example, say a Borrower (minter) supplies $1000 worth of collateral which has an LVR of 60% and a Liquidator Fee of 15%.
At that moment, the collateral is able to collateralize up to 600 $USB. Let’s say the Borrower takes out a loan of 500 $USB. Their loan position’s Health Factor is $600/$500 = 1.2. A Health Factor greater or equal to 1 is above the Liquidation Threshold and is safe from liquidation.
If, because of a downward movement in the price of the collateral, the Total Collateral Value falls to $800. The maximum amount that collateral can guarantee is now 480 $USB. The loan position’s Health Factor is $480/$500 = 0.96. The position is subject to liquidation.
The liquidator pays out the loan (500 $USB) and, in return, receives collateral to the value of the loan plus the Liquidator Fee of 15%. i.e. 115% * $500 = $575.
This leaves the Borrower with $225 in collateral value.
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