Liquidation by Inheritance

In traditional DeFi systems, liquidations function like fire sales: liquidators repay debt, seize collateral at a discount, and immediately sell it for profit. While effective, this approach introduces selling pressure during market stress and demands sophisticated infrastructure to remain profitable.

Twyne introduces a fundamentally different mechanism: liquidation by inheritance. Instead of dismantling positions, they are transferred intact to new owners, who can recapitalize them by adding collateral to satisfy the liquidation thresholds.

How Inheritance Works

When a position becomes liquidatable, any user with sufficient collateral can “inherit” it entirely. Let’s walk through the process:

  1. Position Identification: Alice’s position becomes liquidatable with:

    • Collateral: 100 USDC

    • Debt: 95 USDC

    • Twyne LTV: 95% (exceeding her 90% threshold)

  2. Inheritance Execution: Bob, who has 50 USDC of his own collateral, inherits Alice’s position

  3. Post-Inheritance State: Bob now has:

    • Collateral: 150 USDC (his 50 + Alice’s 100)

    • Debt: 95 USDC

    • Twyne LTV: 63.3% (much healthier)

  4. Profit Mechanism: Bob effectively acquired 100 USDC worth of collateral for 95 USDC of debt, netting 5 USDC in value

Economic Incentives for Inheritance

The inheritance model creates a set of unique incentives that strengthen the protocol:

For Liquidators:

  • No requirement for specialized infrastructure, flash loans, or DEX liquidity, resulting in reduced technical and capital barriers to entry.

  • Acquire assets passively at a discount, with the potential to profit from subsequent market recovery.

  • Earn yield while holding positions prior to liquidation execution.

For the Protocol:

  • Capital remains within the system (i.e., liquidated positions are retained rather than exiting through immediate forced sales)

  • No adverse market impact from collateral being dumped into external markets

  • Broader participation in the liquidation process, due to lower technical and capital barriers

For Credit LPs:

  • Ensures that Credit LPs remain whole and incur no losses

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