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 vulnerable on the underlying lending protocol (like Euler).

This system minimizes the risk of Credit LP losses by resolving distressed positions inside Twyne before the base protocol gets involved.

🌊 Liquidation by Inheritance

Twyne uses a novel liquidation process called Liquidation by Inheritance, inspired by Liquity’s fallback to their Stability Pool model.

Instead of instantly selling off collateral, this mechanism lets eligible users inherit unhealthy positions and take them over. This lets liquidators profit while keeping capital within the system.

Note: Currently, Liquidation by Inheritance serves only a single liquidator. The policy inspired by Liquity's model to distribute liquidations to groups of entities is not built yet.

Inheritance = acquiring a distressed loan position by absorbing its debt and collateral into your own vault — without the need for a market swap.

💡 Why it is so good

• Faster resolution: Distressed positions can be cleaned up before the base protocol intervenes

• Less slippage: No immediate collateral selling

• More accessible: Anyone with unused borrowing power can participate as a liquidator

⚙️ Liquidation By Inheritance Example

Let’s say Alice is a borrower on Twyne.

• She deposits $100 in collateral.

• Her maximum allowed LTV is 95%.

• Market moves against her, and her debt grows to $95.01, exceeding her 95% LTV limit, and she's eligible for liquidation.

Now meet Bob:

• He has $20 collateral and has opted in to absorb liquidations

• Twyne automatically transfers Alice’s entire position (collateral + debt, $100) to Bob.

Bob’s new position:

• Collateral: $20 (his) + $100 (Alice’s) = $120

• Debt: $95.01

• New LTV: ~79% — a healthy position

👉 Bob just gained ~$5 in value by inheriting Alice’s discounted collateral. He can:

• Repay the debt and pocket the profit

• Keep the position open if he expects price recovery

🧮 Formulaic representation of the example ☝️

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.

All details about Liquidationy by Inheritance in the Tech overview.

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⚠️ Fallback Liquidation

If the liquidation by inheritance is delayed and doesn't process it in time, the underlying lending market takes over and triggers its own liquidation.

This is the final safety net during which CLPs may incur losses.

• Liquidations are harsher — the base protocol may liquidate at LTV thresholds that lead to losses for CLPs

• For example, Euler may liquidate around a 90% LTV. If the liquidator fee is high (e.g., >10%), some value may be lost in the process

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

More about the risks of Fallback liquidation in Tech Overview.