Pre-Liquidation

Understand how Lotus pre-liquidation gradually reduces risky positions between PRE_LLTV and LLTV with interpolated close factors and incentive factors.

Pre-liquidation is a mechanism that allows partial liquidation of a borrower's position before it reaches the full liquidation loan-to-value (LLTV). When a borrower's loan-to-value (LTV) ratio enters the pre-liquidation zone — between the pre-liquidation LTV (PRE_LLTV) and the LLTV — a liquidator can partially close the position by repaying some debt and seizing a proportional amount of collateral with a small incentive.

Rather than waiting for a full liquidation, the borrower's position is gradually reduced when it enters the danger zone — reducing the risk of bad debt and giving borrowers more time to add collateral or repay debt.

The Pre-Liquidation Zone

Each pre-liquidation contract defines a zone between two thresholds: PRE_LLTV and LLTV. A borrower whose LTV is below PRE_LLTV is safe from pre-liquidation. A borrower whose LTV is at or above the LLTV is fully liquidatable through the regular liquidation mechanism and cannot be pre-liquidated. Only positions in between — the pre-liquidation zone — are eligible.

0%                    PRE_LLTV            LLTV              100%
|────── Safe ─────────|── Pre-Liq Zone ──|── Full Liq ──────|
                      ^                   ^
                Pre-liquidation          Full liquidation
                begins here              begins here

The diagram shows the LTV spectrum for a borrower's position. Below PRE_LLTV the position is safe from any liquidation. Between PRE_LLTV and LLTV, the position can be pre-liquidated. At or above LLTV, only full liquidation applies.

The closer the borrower's LTV is to the LLTV, the more aggressive the pre-liquidation becomes. Both the close factor (how much of the debt can be repaid) and the liquidation incentive factor (how much extra collateral the liquidator receives) increase linearly from their minimum values at PRE_LLTV to their maximum values at LLTV.

Interpolation

At PRE_LLTV, the close factor is at its minimum (PRE_LCF_1) and the incentive is at its minimum (PRE_LIF_1). As the borrower's LTV approaches LLTV, both values increase linearly to PRE_LCF_2 and PRE_LIF_2 respectively. This creates a smooth gradient of pre-liquidation severity rather than a sudden jump.

A position barely in the zone faces a small partial liquidation with a small incentive. A position near LLTV faces a larger liquidation with a larger incentive. This gradient incentivizes borrowers to act early — the longer they wait, the more expensive pre-liquidation becomes.

The Dedicated Oracle

Each pre-liquidation contract can use its own oracle (PRE_LIQUIDATION_ORACLE), separate from the tranche's main oracle — for example, a faster-updating feed. The pre-liquidation oracle determines the collateral price used for eligibility checks and seized collateral calculations.

Authorization Requirement

The pre-liquidation contract operates by calling repay and withdrawCollateral on the borrower's position in the Lotus core contract. For the collateral withdrawal to succeed, the borrower must authorize the pre-liquidation contract using setAuthorization(preLiquidationAddress, true). Repayment does not require authorization — anyone can repay on behalf of any borrower — but collateral withdrawal does, because it moves the borrower's assets.

Without authorization, pre-liquidation attempts revert. An unauthorized borrower whose position becomes unhealthy goes straight to full liquidation with no soft landing. See Reference → Authorization for the authorization API, including the EIP-712 signed authorization flow for gasless approval.

Deployment via Factory

Pre-liquidation contracts are deployed via the PreLiquidationFactory using CREATE2. Each deployment is specific to a market and tranche, with its own set of parameters (thresholds, close factors, incentive factors, oracle). The factory ensures deterministic addresses, allowing borrowers to compute and authorize the pre-liquidation contract address before it is even deployed. See Build → Pre-Liquidation for deployment steps and parameter guidance.

See Also

• Reference → Pre-Liquidation for the full API

• Build → Pre-Liquidation for deployment and integration guide

• Reference → Authorization for the authorization API

• Learn → Liquidations and Bad Debt for the full liquidation mechanism