Liquidation Penalty

When a vault gets liquidated, its originator has to pay a Liquidation Penalty.

The Liquidation Penalty has an upper limit of 10%, which means the total value of liquidated collateral has an upper limit of 110% (of debt value).

The Penalty ensures that risks to the protocol are mitigated by:

• Encouraging originators to maintain their individual vault collateral ratios above the MCR. This minimizes the number of protocol-wide liquidations, and keeps Chymia safely overcollateralized

• Giving additional compensation to the Stability Pool for providing liquidity to cover liquidations

• Further incentivizing users to become stability providers, avoiding a scenario where the Stability Pool becomes underfunded