Liquidation auctions

Unwinding escrows that turn unhealthy during asynchronous settlement are liquidated through a competitive auction. The interim collateral backing the escrow cannot be flash-sold, so the auction does not hand the bidder any collateral: the winner funds the debt repayment in the base asset, the protocol redeems the seized exposure through the asset’s own settlement process, and the winner holds a deferred claim in the base asset.

Bidding requires a valid Keyring credential for the market’s auction policy; participation is otherwise permissionless.

How it differs from a classic liquidation

Mechanism

A reverse-bonus auction over a bidding window: bidders quote the bonus they will accept for performing the liquidation, and the lowest bonus at close wins. Each round is opened with a maximum bonus, and each new bid must undercut the current best by at least a configured minimum decrement; a bid above the ceiling, or one that does not improve by the decrement, is rejected.

When

After the request settles, which is asynchronous. Capital is locked from execution until claim.

The lifecycle

1. Bid. submitBid(roundId, bonus) while the round is open.
2. Liquidate. After the auction ends and before the execution deadline, the best bidder funds the repay and calls executeWinningRound. If the executable repay comes in below the requested amount, the difference is refunded on the spot.
3. Settle. The protocol redeems the seized exposure through the configured adapter. Asynchronous, outside the bidder’s control.
4. Redeem. Once the request finalises, the winner claims actualRepay + bonus with claimWinningRoundPayout(roundId).

Who executes on-chain

The winner never touches the lending market directly. When a round closes, the auction contract calls the unwind manager, which grants its internal liquidator contract vault access transiently, executes the liquidation and debt repayment in a single batch, and revokes the access in the same transaction. No external address ever holds vault permissions, before, during, or after.

The bid bond

The first bid in a round locks a bond, a configured share of the round’s repay amount, denominated in the base asset. The bond is refundable when outbid (the current best bidder’s bond stays locked), is applied toward the repay at execution, and is slashed only when a winner fails to execute before the deadline. Rounds closed because the position healed return all bonds unslashed. Expiring a lapsed round (which slashes the absent winner’s bond) and closing a healed round are both permissionless; neither needs a privileged caller.

Payout seniority

Settled proceeds are applied in strict priority: escrow debt closure first, the winner’s entitlement second, the requester’s residual last. The winner is senior to the requester but junior to debt closure, so a settlement shortfall first eats the requester’s residual, then the winner’s entitlement. An unpaid portion remains claimable if further recoveries arrive and becomes a realised loss only if the request closes with nothing more expected. This seniority risk, not collateral slippage, is what the bonus must compensate.

Pricing a bid

Treat the bid as a reservation bonus: the lowest bonus at which the trade still clears the hurdle, bidding just above it.

• Cost of capital over the lockup, from execution to settlement.
• Shortfall premium: probability and severity of settled proceeds falling short, conditioned on being junior to debt closure. Usually the dominant term; it depends on the tokenised asset’s NAV stability, the provider’s reliability, and the headroom above the debt.
• Bond carry, gas, and oracle fees (execution forwards value for oracle updates).

The on-chain oracle determines liquidatability, not realised redemption value, so the tokenised asset’s redemption value, the settlement window, and the proceeds-over-debt headroom must be assessed independently before bidding. Liquidatability and the executable repay are re-checked at execution; a healed position closes the round with bonds returned and no profit, so a bonus that cannot actually be captured should never be priced in.

Auction parameters (window, bond share, maximum bonus, minimum bid decrement, policy) are per-market configuration. Interfaces and events are listed under smart contracts.