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In order to ensure that each Hue token is backed by at least 1 Hue worth of Eth, liquidators are empowered to correct any positions that endanger the system.
Liquidation simply means that when a position doesn't have enough collateral, a liquidator can pay off the debt (Hue), and receive a greater value of collateral (Eth) in return. The liquidator benefits as they have gained value. The position owner takes the loss that the liquidator gains for endangering the protocol. This also serves as an incentive for position owners to never endanger the protocol, and to maintain sufficient collateralization.
TCP implements novel liquidation logic in order to ensure that positions can be instantly liquidated as soon as they pose any danger to the system. It works by separating discovering and correcting an undercollateralized position and settling it into two steps, so that there is never a case where an undercollateralized position goes uncorrected because the liquidator doesn't have enough capital to correct the position.
The Keeper does the following:
TCP does the rest:
Anyone can pay off debt from the liquidation pool and get an equal portion of collateral back. If the liquidation pool has 100 Hue and 2 Eth, someone could send 50 Hue to the pool and recieve 1 Eth back. They could also flash loan Hue from another system like Uniswap, pay off all of the debt in the pool, and receive all of the collateral back to pay off the loan, and keep the proceeds for themselves.