Prominent Ethereum-based lending and borrowing protocols unwound a record $200 million in crypto loans on Friday, reports godbole17.
Ether's recent sell-off has brought pain to some and cheer to others, underscoring the zero-sum nature of trading.
Borrowers are liquidated when a crypto crash pushes the collateral's value below the safety threshold. The process is analogous to derivatives exchanges executing a forced closure of long or short positions due to margin shortage. Users put ether as collateral on the Maker platform, opening a vault position to borrow DAI equivalent to a portion of the collateral's value. Borrowers need to pay back the DAI along with the loan interest when they want to withdraw their collateral.
The liquidations penalty is calculated as a percentage of the debt. Maker also has a debt ceiling, a mechanism controlling the maximum amount of DAI that can be generated against different collaterals. If the ceiling is hit, users must pay down their existing debt before taking more.When a position in liquidated, the ETH deposited as collateral is sold for DAI, which is then burned, or destroyed.
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