DEFİ

If you’ve ever borrowed in DeFi, you’ve probably come across the term Health Factor. Think of it as the heartbeat of your lending position ; the higher it is, the safer you are.

Here’s how it works:
What it is: Your Health Factor is a single number that shows how secure your borrowing position is.
How it’s calculated: It takes into account the assets you supplied, their loan-to-value ratios, and current prices ; then compares that against what you’ve borrowed.
Why it matters: A score above 1 means your position is safe. But if it drops below 1, your loan is in the danger zone.
And here’s the key part , liquidation.
When your Health Factor slips under 1, the protocol steps in and sells off part of your collateral. This isn’t a penalty; it’s a safety mechanism that protects both you and everyone else in the system from collapse.
Bottom line: Keep an eye on your Health Factor. It’s the difference between a secure loan and an unwanted liquidation.

HOPE, you get a LITTLE BASIC IDEA about #healthfactor , if you have any Questions or Suggestions , please leave a comment. we will reply you as soon as possible.
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Introduction: Liquidations as a Safety Valve
In volatile crypto markets, lending platforms survive by quickly resolving undercollateralized positions. Liquidation acts as the critical safety mechanism. Unlike simple protocols where liquidations are “repay debt, seize collateral, pocket bonus,” Dolomite operates on a complex margin and lending system with cross-asset exposure, position isolation, and multi-chain integration. Such complexity demands carefully designed liquidation incentives and execution safeguards.

This article breaks down Dolomite’s liquidation mechanics, how liquidators are rewarded, the associated risks, and areas for future improvement—backed by real metrics like TVL, penalty rates, and governance rules.

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1. Core Liquidation Mechanics

Health Factor & Thresholds
Dolomite employs a Health Factor to consolidate multiple positions, assets, and thresholds into a single safety metric. A Health Factor below 1 flags the position for liquidation. The default liquidation threshold is 115% collateralization (~87% LTV), requiring users to maintain roughly 15% overcollateralization.

Liquidation Penalty & Spread Premiums
Liquidators earn a 5% baseline penalty plus market-specific spread premiums. Riskier or illiquid assets have higher premiums, compounding across collateral and debt. For instance, a WBTC/LINK pair with 40% spread premiums results in an effective penalty of ~9.8%.

Full vs. Partial Liquidation & Vaporize
Currently, Dolomite liquidates full positions to avoid fractional residues. Partial liquidation is planned for the future. If collateral is wiped but debt remains, the Vaporize mechanism allows the DAO or treasury to absorb residual bad debt, preserving solvency.

Example: A user with 2 ETH collateral borrowing 2,000 DAI triggers liquidation. The liquidator repays 2,000 DAI + 5% penalty and claims ~1.8261 ETH, leaving ~0.087 ETH as profit before fees.

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2. Incentive Design: Attracting Keepers Without Overburdening Users

Liquidation Bonus as Incentive
Penalties act as rewards. Competent liquidators repay debt, seize collateral, and profit from price differentials. Properly calibrated premiums ensure competitive participation without excessive user losses.

Spread Premiums by Asset Risk
Assets with high volatility or low liquidity carry steeper premiums, aligning liquidator rewards with execution risk.

Governance & veDOLO
Through veDOLO, governance can adjust risk parameters, penalties, and incentives. Current liquidations require a “global operator,” but future automation via Chainlink oracles could redirect some liquidator profits to the DAO, balancing private gain and protocol benefit.

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3. Execution Challenges

Liquidity & Slippage
Popular assets like ETH, USDC, and WBTC usually maintain depth. Smaller or low-cap assets may experience extreme slippage, reducing liquidation incentives or causing failures.

Gas, Latency & Oracles
L2 deployments on Arbitrum and Mantle reduce normal gas costs, but stress events can delay transactions or misprice collateral due to bridge congestion or oracle lag.

Keeper Participation & Centralization Risks
A diverse keeper network ensures speed and resilience. Relying on a single “global operator” introduces potential centralization risks.

Governance Lag
Slow proposal processes can leave risk parameters outdated during volatile periods, under-incentivizing liquidators or over-penalizing users.

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4. On-Chain Metrics & Protocol State

TVL: ~$348M

Borrowed Capital: ~$126M

Annualized Fees: ~$12.1M (30-day fees ~$990k)

Tokenomics: DOLO → veDOLO model; Year 4 inflation ~3% annually (governance adjustable)

Rapid TVL growth from ~$50M in early 2025 to nearly $400M highlights strong adoption but raises questions about scalability of risk controls.

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5. Key Metrics to Monitor

1. Keeper Decentralization & Activity – More independent keepers reduce bottlenecks.

2. veDOLO Governance Responsiveness – Speed and turnout during volatile markets are critical.

3. Insurance/Reserve Fund – A dedicated reserve protects against liquidation failures, beyond the Vaporize mechanism.

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6. Suggested Improvements

Emergency Reward Mode: Boost liquidation bonuses in volatility.

Insurance/Reserve Fund: Explicit coverage for bad debt.

Hybrid Keeper Model: Open keeper pool with oracle agents to reduce centralization.

Dynamic Premiums: Adjust spread premiums based on live market metrics.

Gas Subsidies/Rebates: Ensure profitable liquidation in low-margin scenarios.

Transparent Analytics: Public dashboards for penalties, slippage, and keeper profits.

Phased Partial Liquidation: Gradually introduce partial liquidations to reduce user losses.

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7. Summary & Outlook

Dolomite’s liquidation framework combines a 5% global penalty, adjustable spread premiums, full-position execution, and veDOLO governance. With TVL of ~$348M and $126M borrowed, the system is operational and generating real revenue.

Key risks include keeper centralization, governance lag, market illiquidity, and lack of a formal reserve. Addressing these can turn liquidation efficiency into a competitive advantage rather than a vulnerability.

Metrics to Watch:

Frequency of liquidations & keeper diversity

veDOLO proposal activity during volatility

Establishment of an insurance reserve

Rollout of partial liquidations and oracle-driven keepers

#Dolomite @Dolomite $DOLO #DEFİ #crypto

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