Safety & Liquidation Mechanisms

To safeguard the system, especially the assets of Credit LPs, Twyne introduces its own liquidation framework, acting as the first line of defense before any position becomes liquidateable on the underlying lending protocol (like Euler).

By resolving distressed positions internally, Twyne reduces the probability that Credit-LPs are exposed to losses through of underlying lending markets liquidations.

Liquidation by Inheritance

Twyne uses a mechanism called Liquidation by Inheritance, inspired by Liquity’s fallback to its Stability Pool model.

This mechanism lets Twyne liquidators inherit an unhealthy position by absorbing its debt and collateral into their own vault.

  • This avoids immediate collateral sales.

  • It keeps capital within the system.

  • It creates a profit opportunity for the liquidator.

Note: Currently, inheritance is limited to a single liquidator per event. A more distributed design, where liquidations are shared among multiple entities, is planned but not yet implemented.

Advantages of Inheritance

  • Faster resolution: Positions are cleared before the base protocol intervenes.

  • Reduced slippage: No forced selling of collateral.

  • Accessibility: Any user with unused borrowing power can act as a liquidator.

A detailed specification of Liquidation by Inheritance is provided in the Tech Overview

⚙️ Liquidation By Inheritance Example

Consider Alice, a borrower on Twyne.

  • She deposits $100 in collateral.

  • Her maximum allowed LTV is 95%.

  • Market conditions move against her, and her debt rises to $95.01, slightly above her LTV limit. At this point, her position becomes eligible for liquidation.

Now consider Bob, who has $20 in collateral and has opted in to act as a liquidator.

  • Twyne transfers Alice’s entire position (her $100 collateral and $95.01 debt) into Bob’s vault.

  • Bob’s updated position is:

  • Collateral: $20 (his own) + $100 (inherited) = $120

  • Debt: $95.01

  • Resulting LTV: ≈ 79%, a healthy position.

Bob effectively acquires Alice’s collateral at a discount. His net gain is about $5, arising from the difference between collateral value and inherited debt. He can choose to:

  1. Repay the debt and lock in the profit, or

  2. Maintain the position, if he expects collateral values to recover.

🧮 Calculation

If Bob inherits Alice’s position:

λ_Bob_Twyne = (B_Bob + B_Alice) / (C_Bob + C_Alice)

If a Credit LP (Charlie) becomes a liquidator using idle capacity:

λ_Charlie_Twyne = B_Alice / (C_extra_LP + C_Alice)

In both cases, Twyne ensures — via smart contracts — that the liquidator has enough collateral to absorb the position safely.

Please find all details about Liquidation by Inheritance.

⚠️ Fallback Liquidation

If Twyne liquidators fail to act in time, the underlying protocol executes its standard liquidation process.

In this case:

  • From the protocol’s perspective, borrower and Credit-LPs form a single account.

  • The base protocol liquidates at its own thresholds (e.g., ~90% LTV on Euler), applying its liquidation incentive.

  • This can result in losses for Credit-LPs.

That said, fallback liquidation can still work in the CLP’s favor if the borrower’s collateral is sufficient to cover debt + incentives.

Here you you can find more about the risks of Fallback Liquidations.

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