# Collateral & Liquidations

**Liquidations**

A critical process triggered when a borrower's health factor falls below 100%. This may happen when the collateral value decreases, or the borrowed debt increases relative to each other.

Simple terms 

```
Health Factor = Sum(Debt AssetQty * Price)/ Sum (Collateral Asset Qty * Price * Liquidation Loan to Value)) 
```

In the main market, this requires a sumproduct operation across the range of all oustandging borrowed assets 

In isolated markets the range is less 

Liquidations are triggered by Oracle price feeds and managed by liquidator bots (both internal and third-party). A liquidation penalty is applied to the value of the collateral during liquidation, incentivizing liquidators.

***

#### Collateral Types and Selection

Solera supports three types of collateral, each with different protocol capabilities. Each asset is classified according to the asset risk assessment framework.

1. Main Market Collateral: ERC-20 and OFT tokens with high liquidity.
2. Isolated Market Collateral: Assets that may not meet the criteria for the main market but are supported via isolated markets with stricter borrowing limits.
3. RWA Collateral: Real-world assets (e.g., US Treasuries) that require special considerations due to liquidity constraints and non-immediate redemption.

Each new token introduced as collateral increases protocol complexity and solvency risk. Only assets with strong risk profiles should be supported as collateral.

#### Main Market Liquidations

Solera's main lending market is designed after Aave, where a users **health factor** indicates when a position is eligible to be closed, **close factor** indicates how much collateral can be seized by liquidators to earn the **liquidation incentive**. 

For more information on liquidation logic and tips on managing your health factor, refer to <https://aave.com/docs/concepts/liquidations>.

#### Isolated Market Liquidations

Solera's Isolated markets run on the Morpho stack. As such, all liquidation concepts from Morpho apply. Read <https://docs.morpho.org/overview/concepts/liquidation/> for more information on liquidation mechanisms.

#### RWA Liquidation Flow

For select assets liquidation and redemption agents perform liquidations and redeem the underlying collateral at a future depending on the specific asset's liquidity profile. Liquidators receive a liquidation bonus for assuming the credit risk incurred between collateral seizure and off chain redemption.