> For the complete documentation index, see [llms.txt](https://jpycompound.gitbook.io/jpycompound-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://jpycompound.gitbook.io/jpycompound-docs/lending/liquidation.md). # Liquidation ### Understanding Liquidation in JPYCompound In JPYCompound, each lending market is configured with unique parameters that define how much a user can borrow relative to the value of their provided collateral. When market conditions shift, this ratio can change: * If the value of borrowed assets **appreciates**, or * If the value of collateral assets **depreciates**, a borrower’s account may become **unhealthy (health factor ≤ 1)**. This occurs when the value of borrowed assets crosses the **Liquidation Threshold**, meaning the debt has exceeded the acceptable limit compared to the collateral value. In such cases, the account becomes subject to liquidation. This mechanism is especially important in yen-denominated markets, where users may otherwise be forced to hedge against FX volatility in USD-based protocols. By operating directly in JPY, liquidation risk can be managed more transparently and natively in the local currency. *** ### How Liquidation Works JPYCompound is powered by transparent smart contracts. While user identities remain private, account health is **publicly visible on-chain**. When a loan falls below a healthy threshold (health factor ≤ 1), the protocol designates it as **liquidatable**. A liquidation must then occur to restore the Loan-to-Value (LTV) ratio to a safe level. * **Liquidators** continuously monitor accounts and identify those requiring liquidation or nearing the threshold. * During liquidation, liquidators purchase a portion of the borrower’s debt **at a discount**. * This process reduces the borrower’s outstanding debt while seizing a portion of collateral. * After liquidation, the account is restored to a healthy status, ensuring the stability of the entire lending market. This incentive system encourages liquidators to act quickly, maintaining stability for JPYCompound markets. *** ### Liquidation Penalty A **Liquidation Penalty** is charged to the borrower when collateral is seized in liquidation. Each JPY stablecoin market applies a penalty rate based on asset-specific risk analysis. Borrowers can view the exact liquidation penalty for their chosen collateral asset at the time of borrowing. Additionally, **Efficiency Mode (e-mode)** is available for correlated asset groups. In JPYCompound, e-mode allows lower liquidation penalties and higher capital efficiency for closely related assets (e.g., different JPY stablecoin variants such as JPYC, JPYT, or bridged JPY). *** ### Why This Matters for JPY Lending Traditional DeFi protocols in USD expose Japanese investors to **double risk**: both liquidation risk and FX volatility. By anchoring liquidation parameters directly in JPY: * Risks are measured **in the native currency** of the investor. * Collateral management and LTV thresholds become **more predictable**. * Market stability improves, with incentives aligned to the yen-based ecosystem. JPYCompound thus creates a **fairer, safer liquidation framework** tailored for the Japanese yen, while preserving the transparency and trustless execution of DeFi. --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://jpycompound.gitbook.io/jpycompound-docs/lending/liquidation.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.