The health of a borrower’s position in the protocol is determined by the loan-to-value ratio: the value of borrowed capital / collateral value. Healthy accounts have lower LTVs, meaning there is enough collateral value to cover the debt + an adequate safety buffer. Unhealthy accounts have smaller safety buffers, and will be subject to liquidation if collateral values fluctuate and the collateral value no longer covers the debt position.

In a liquidation, liquidators repay a portion of the borrower’s debt in exchange for an equal-value portion of their collateral (plus a small reward paid from their collateral). Liquidations allow the protocol to maintain solvency where all debts are adequately collateralized.

Granite Protocol is unique in that liquidations are only permitted back to the point of borrower account solvency - liquidators are not allowed to liquidate more than is required to regain solvency. This is different than most DeFi lending protocols, where liquidators can take 50-100% of a borrower’s collateral if their account becomes insolvent (which is very detrimental to borrowers). Granite’s approach of limiting liquidations to the minimum amount of capital required to return an account to solvency reduces the impact of liquidations for the borrower while also maintaining protocol solvency.