# Loan Defaulting/Liquidation

Defaulting on a loan (or liquidation) occurs when a position's LTV (loan-to-value) exceeds a threshold close to or at 100%, meaning the borrowed value exceeds the collateral value put up for the loan.

Using the below formula, if the collateral value + accrued fees cause the loan's LTV to exceed 92%, the loan will be liquidated via [Chainlink Automations](https://chain.link/automation), which relinquishes the user's collateral to the protocol.

The 92% LTV default threshold effectively means a borrower will pay a 8% liquidation fee at the time default occurs.

```
LTV % = ((loan amount + fees) / collateral value) * 100
```

### Collateral Value Changes

LTV of a collateralized loan is a function of the value of the collateral put up for a loan, the borrowed asset value, and amount borrowed (all valued in USD). All assets and values are continuously monitored on-chain using [Chainlink Automations](https://chain.link/automation) which handles executing loan liquidation as needed.

#### Example:

Jay secures a 0.5 ETH loan with a 5% APR using 2 billion PEPE as collateral, valued at 1 ETH.\
Having borrowed 0.5 ETH, Jay's loan has a 50% LTV ratio.\
After a period of time, along with accumulating 0.1 ETH in interest fees, the value of PEPE could also change.

#### PEPE Increases:

If the value of PEPE were to increase to where Jay's 2 billion PEPE collateral is now worth 2 ETH, then the loan's LTV ratio would decrease to 25% allowing Jay to potentially borrow additional funds against the original collateral.

#### PEPE Decreases:

If the value of PEPE were to decrease to where Jay's 2 billion PEPE collateral is now only worth 0.7 ETH, Jay's LTV ratio would then increase to 85%.\
Jay would need to pay back some or all of the borrowed ETH before the loan's LTV ratio reaches 92% or Jay's loan will default and the 2 billion PEPE will be relinquished to the protocol.

### Defaulted Collateral Assets

Assets acquired through the defaulting of loans against the protocol owned lending pool are evaluated on a case by case basis by examining the current and future value of each asset to determine the best course of action.\
\
Capital gained may be used for a number of things that include, but are not limited to: adding funds to the lending pool, distributing to protocol rewards, marketing or other protocol expenses.

Assets acquired through the defaulting of loans against the [HLP lending pool](https://docs.hyperbolicprotocol.com/hlp-provide-liquidity) are automatically liquidated with 100% of the liquidated funds being returned to the HLP lending pool. If needed, auto-liquidation can be disabled for a collateral option.