How Is the Liquidation Penalty Calculated in a CDP System?
The liquidation penalty is a fee charged to the borrower whose collateral is liquidated. It is typically a percentage of the outstanding debt.
This penalty is designed to incentivize borrowers to maintain sufficient collateral and to cover the costs of the liquidation process. The penalty is added to the debt, and the liquidator is rewarded with a portion of the collateral.
Glossar
Liquidation Penalty
Consequence ⎊ The liquidation penalty, inherent in cryptocurrency derivatives and options trading, represents the financial detriment incurred when a position is forcibly closed due to margin requirements falling below a predetermined threshold.
Penalty
Consequence ⎊ A penalty within cryptocurrency, options trading, and financial derivatives typically represents a financial disincentive imposed for non-compliance with contract terms or exchange rules.
Cdp
Framework ⎊ Collateralized Debt Positions (CDPs) represent a core mechanism within decentralized finance (DeFi), specifically serving as the foundation for over-collateralized lending protocols.
Liquidation Penalty Fee
Liquidation ⎊ The imposition of a liquidation penalty fee within cryptocurrency derivatives, options trading, and broader financial derivatives represents a consequence of margin calls exceeding available collateral, triggering automated asset sales to cover outstanding obligations.