Collateral liquidation

In case of a liquidity pool loan default despite collection and recovery efforts by working with the borrower and relevant resources, Svim Finance will start the collateral liquidation process. We work closely with our asset partners in this crucial process to maximize the value recovery for investors or liquidity providers. Here’s a detailed explanation of the feature, process, and possible outcome scenarios for investors or liquidity providers:

Features of Loan Collateral Liquidation

Automated Liquidation Triggers:

• Smart Contracts: Utilize smart contracts to automatically initiate the liquidation process when specific default conditions are met.

• Criteria: Conditions include failure to repay within the grace period, breaching restructured payment terms, or failing to meet other loan covenants.

Collateral Valuation and Liquidation:

• Market Value Assessment: Assess the current market value of the collateralized assets to determine the liquidation strategy.

• Auction or Sale: Liquidate the assets through an auction or direct sale on a decentralized marketplace.

Proceeds Distribution:

• Pro Rata Distribution: Distribute the proceeds from the liquidation to the investors or liquidity providers based on their share in the pool.

• Fee Deductions: Deduct any applicable fees or costs associated with the liquidation process.

Process of Loan Collateral Liquidation

Triggering Liquidation:

• Default Confirmation: Confirm that the borrower has defaulted and all recovery efforts have failed.

• Smart Contract Activation: The smart contract governing the loan automatically triggers the liquidation process.

Collateral Valuation:

• Appraisal: Conduct an appraisal of the collateralized assets to determine their fair market value.

• Market Analysis: Analyze the current market conditions to identify the best strategy for liquidation (e.g., auction, direct sale).

Auction or Direct Sale:

• Auction Setup: If auctioned, set up the auction on a decentralized platform, specifying the starting bid, duration, and other relevant details.

• Direct Sale: Alternatively, list the assets for direct sale on appropriate marketplaces.

Proceeds Collection and Distribution:

• Sale Execution: Complete the sale and collect the proceeds.

• Fee Deduction: Deduct any fees or costs associated with the liquidation process.

• Pro Rata Distribution: Distribute the remaining proceeds to the liquidity providers based on their proportionate share in the pool.

Possible Outcome Scenarios

Fully Recovered:

• Scenario: The liquidation process recovers the full loan amount and expected yield.

• Investor Return: Investors receive their full investment principal plus the expected yield.

• Impact: Positive outcome, maintaining investor confidence and the liquidity pool’s stability.

Partially Recovered:

• Scenario: The liquidation process recovers the full investment principal but only part of the expected yield.

• Investor Return: Investors receive their full principal amount and a portion of the expected yield.

• Impact: Acceptable outcome, with some yield loss but principal protection, which helps retain investor trust.

No Yield Recovery:

• Scenario: The liquidation process recovers the full investment principal but no yield.

• Investor Return: Investors receive their full principal amount but no yield.

• Impact: Neutral outcome, preserving principal but failing to provide returns, which may affect future investor interest.

Partial Loss of Principal:

• Scenario: The liquidation process recovers only a portion of the investment principal.

• Investor Return: Investors receive a reduced principal amount, with no yield.

• Impact: Negative outcome, leading to partial loss of capital and potential loss of investor confidence in the pool.

Full Loss of Principal:

• Scenario: The liquidation process fails to recover any of the investment principal.

• Investor Return: Investors lose their entire principal amount and yield.

• Impact: Highly negative outcome, resulting in total capital loss and significant loss of trust and credibility for the liquidity pool.

The loan collateral liquidation process in tokenized RWA liquidity pools is designed to protect investors by recovering value from defaulted loans. It involves automated triggers, asset valuation, auction or direct sale, and proceeds distribution. The outcome scenarios range from full recovery, partial recovery, no yield recovery, partial loss of principal, to full loss of principal, each with different implications for investor returns and confidence.