This page explains the risks associated with liquidations on Mooncake
Liquidations form a crucial part of our risk management strategy, ensuring the stability of the Mooncake Finance ecosystem. In the event of collateral value dropping below-specified thresholds, users might face liquidation.
As we are a fork of Aave v3, our liquidation mechanisms are the same and carry the same risks as Aave.

Purpose of Liquidations

  • Ensuring Protocol Stability: Liquidations act as a check and balance, ensuring that borrowed assets are always sufficiently collateralized. This not only safeguards individual users from potential defaults but also protects the entire ecosystem from cascading failures.
  • Protecting Lenders: Lenders provide the liquidity that powers Mooncake Finance. Liquidations guarantee that the assets they supply are always recoverable, preserving their confidence in our ecosystem.
  • Maintaining Systemic Health: By actively managing risk through liquidations, Mooncake Finance can continue to offer competitive borrowing and lending rates, thereby fostering a balanced and prosperous ecosystem.

Mechanics of Liquidation

  • Threshold Triggers: When the value of a user's collateral drops below a specified ratio, the system automatically flags the position for liquidation. The specific thresholds and parameters are set by Mooncake Finance governance and are periodically reviewed.
  • Liquidation Penalties: Users facing liquidation will encounter a penalty, which is deducted from their collateral. This serves as compensation for the protocol and liquidators who execute the liquidation.
  • Partial and Full Liquidations: Depending on the severity of the collateral drop and other factors, users might face either partial or full liquidation. The specifics of these scenarios will be guided by parameters similar to those set in Aave V3.

Shared Heritage with Aave V3

Mooncake Finance's approach to liquidations is deeply rooted in the established methodologies of Aave V3. Given our forked lineage:
  • Proven Mechanisms: By inheriting Aave V3's liquidation mechanics, Mooncake Finance benefits from tried-and-tested methodologies that have stood the test of time and turbulent market conditions.
  • Consistent Risk Profile: Users familiar with Aave will recognize the liquidation risks associated with Mooncake Finance as they align closely. However, it's always recommended for users to familiarize themselves with our documentation and any nuanced differences.
  • Iterative Improvements: While our foundational mechanics mirror Aave's, Mooncake Finance is dedicated to continuous improvement. Over time, based on community feedback and evolving market dynamics, we might introduce refinements to enhance our liquidation processes.
User Recommendations
  • Stay Informed: Always monitor your collateralization ratios. With volatile assets, it's easy to drift close to liquidation thresholds.
  • Diversify Collateral: Where possible, diversify the assets you use as collateral to mitigate the risk of any single asset's sharp price decline.
  • Set Alerts: Use Mooncake Finance's integrated tools or third-party services to set alerts notifying you of potential liquidation threats.