Practical Examples and Edge Cases

Let’s walk through several scenarios to cement understanding of how liquidations work in practice.

Example 1: Standard Twyne Liquidation

Initial State:

• Alice deposits 10 ETH, borrows 8 ETH worth of USDC

• Her Twyne liquidation LTV: 85%

• CLP credit reserved: 2.5 ETH

• Total position: 12.5 ETH collateral, 8 ETH debt

Market Movement: ETH price drops 10%

• Debt value in ETH terms: 8 / 0.9 = 8.89 ETH

• Alice’s Twyne LTV: 8.89 / 10 = 88.9% > 85% ✓ Liquidatable!

Liquidation by Bob:

• Bob has 5 ETH available

• He inherits Alice’s entire position

• New position: 15 ETH collateral, 8.89 ETH debt

• Bob’s Twyne LTV: 59.3% (healthy)

• Bob’s profit: 10 - 8.89 = 1.11 ETH in value

Example 2: Near External Liquidation Threshold

Initial State:

• Charlie has a high-risk position with ρ = 0.95

• External protocol liquidation LTV: 75%

• Safety buffer: 95%

• Position barely safe from external liquidation

Rapid Market Movement: 15% price drop in one block

• Position bypasses Twyne liquidation opportunity

• External protocol liquidates with 5% incentive

• Remaining assets split between Charlie and CLPs

Outcome Analysis:

• CLPs recover their principal (due to safety mechanisms)

• Charlie loses his excess collateral

• Protocol remains solvent

Example 3: Cascade Prevention

Scenario: Multiple correlated positions approaching liquidation

• Position A: 84% LTV (threshold 85%)

• Position B: 83% LTV (threshold 85%)

• Position C: 82% LTV (threshold 85%)

Market Drop: 2% price movement would liquidate all three

Twyne’s Response:

• Inheritance model allows gradual absorption

• Different liquidators can take different positions

• No forced selling creates price pressure

• Market can stabilize without cascade