Illustration of Borrower Liquidation (w/ replacement borrower)

A borrower is liquidated for not maintaining the required (real) collateralization ratio. A replacement borrower is found and assigned to the loan.

Let's borrow steps 1-2 from the previous example. However, instead of Lender A being paid back before the due date, another Borrower is assigned from the Borrowing Bid Order Book with the same due date as the loan that is being liquidated.

In Step 1, Borrower A borrows with a relatively risky collateralization ratio of 159%.

In Step 2, the value of ETH drops from $3000 to $2400, causing Borrower A's collateralization ratio to drop below the 130% liquidation threshold.

In Step 3, Borrower A is liquidated. However, instead of paying back Lender A directly as in the previous example, a replacement borrower (Borrower B) is assigned. Borrower B is sent 1862 USDC which, in addition to the interest rate demanded by Borrower B will result in 1890 USDC due to Lender A as expected.

In the previous example without a replacement borrower, there was a remainder of 510 USDC. Here we see 538 USDC.

Of the 2 ETH backing the loan, 1.575 ETH is converted into 1890 USDC. The new borrower borrows at 3% APR for 6 months, paying rate of 1.5% to get 1890 / (1.015) = 1862 USDC. The remaining 1890 - 1862 = 28 USDC is earned directly by the protocol as the time value of money. Then, we have 2 - 1.575 = 0.425 ETH of the collateral remaining that is split between the liquidated borrower and the protocol. This method is permissioned.