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FiRM Liquidations & Replenishments

Liquidations and forced replenishments are the two main risks when borrowing on FiRM. Both result from inadequate position management but trigger under different conditions.

Liquidation occurs when your collateral value drops too low relative to your debt. Your collateral is sold to repay the loan, and you lose your deposited assets.

Forced Replenishment occurs when your DBR balance hits zero while you still have debt. DBR is automatically purchased at premium prices and added to your debt.

Both are preventable through active position management. Neither happens suddenly without warning if you monitor your position regularly.

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Prevention is key: Understanding these mechanisms helps you maintain healthy positions. Most liquidations and replenishments are completely avoidable with proper monitoring.

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Liquidations

If the value of a borrower's debt exceeds the value of their maximum permitted credit limit (determined by the Collateral Factor % parameter setting for the market), a portion or the entirety of their debt (determined by the Liquidation Factor % parameter setting for the market, which sets the upper limit) can be repaid by a liquidator. In return, the liquidator can seize the lenders collateral with a bonus (determined by the Liquidation Incentive % parameter setting for the market).

When your position becomes eligible for liquidation, anyone can act as a liquidator by repaying your debt in exchange for your collateral at a discount.

The liquidation process:

1

Position becomes liquidatable

Your collateral hits your positions' liquidation price. The position is now visible to liquidation bots monitoring the protocol.

2

Liquidator repays your debt

A liquidator (usually an automated bot) repays some or all of your DOLA debt to the protocol.

3

Liquidator receives your collateral

In exchange, they receive your collateral and a bonus incentive, compensating the liquidator for taking the position.

4

Your position is closed or reduced

If fully liquidated, your position closes and you receive nothing. If partially liquidated, your remaining collateral stays deposited with reduced debt.

5

Example

  • Bob intends to borrow from FiRM's wETH market, which is configured to have the following parameters: Collateral Factor: 80%, Liquidation Factor: 100%, Liquidation Incentive: 5%.

  • Bob's collateral (1 wETH) is worth $4000 at the time of deposit, and with this the maximum he can borrow is 0.8 ETH worth of DOLA (0.8 *$4000 = $3200).

  • Bob borrows 0.65 WETH worth of DOLA ($2,600), which puts his collateral ratio (Debt / Collateral Factor) at 81.25%, generally viewed as a ratio at high risk for liquidation.

  • Sometime after Bob's deposit and borrow, the USD price of WETH drops dramatically by 25% in one block to $3,000. This decreases the maximum amount of DOLA that Bob can borrow (his credit limit) from $3,200 to $2,400.

  • The amount of Bob’s loan ($2,600) is now at $200 more (108%) than his credit limit ($2,400) and the loan is now considered insolvent. Bob can no longer withdraw his collateral from FiRM or borrow more until he has either repaid part of his debt or deposited more collateral to increase his credit limit.

  • In a liquidation scenario, however, and before Bob can take direct action, an external liquidator notices that Bob’s loan is insolvent. The liquidator repays Bob’s entire (100%) outstanding debt of $2600 to FiRM. At the same time, the liquidator seizes $2600 worth of Bob’s WETH plus an additional 5% of his WETH as a liquidation “bonus”, or $160 in WETH.

  • Bob now has no outstanding DOLA debt on FIRM and after liquidation costs, has $120 in WETH remaining on FiRM.

Who are liquidators? Mostly automated bots run by sophisticated operators who monitor all FiRM positions continuously. They profit from the liquidation penalty while providing a crucial service keeping the protocol solvent. When your position becomes liquidatable, expect liquidation within a few blocks depending on profitability and gas prices.

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Replenishment

Forced replenishment occurs when your DBR balance reaches zero while you still have outstanding debt. Unlike liquidation, replenishment addresses insufficient borrowing rights.

DBR decreases continuously at a rate proportional to your debt. With 5,000 DOLA borrowed, you consume approximately 13.7 DBR per day (5,000 / 365). If you purchased exactly enough DBR for your intended duration but hold the loan longer, or if you forget to top up, your balance eventually hits zero.

The DBR replenishment rate, expressed in APR, is charged to borrowers when their DBR balance falls to 0 whilst holding an open loan position on FiRM, triggering a replenishment event. When this occurs, anyone can call forceReplenish on the borrower's position—the full replenishment cost is added to the borrower's DOLA debt, while the replenishment incentive determines how that cost is split between the caller and the DAO Treasury. If borrowers fall into the replenishment zone, the replenishment rate encourages them to add more DBR to their balance to avoid additional costs. Borrowers with a continuous DBR deficit will eventually accumulate enough debt in the protocol to be liquidated, unless they terminate their loan or continue to add collateral. The replenishment rate must be higher than the DBR price to act as an effective incentive for borrowers to maintain adequate DBR balances, as it represents a de facto cost ceiling on borrowing in FiRM.

The replenishment process:

1

Your DBR hits zero

You still have outstanding debt but no remaining borrowing rights. Your wallet with the open position has a 0 DBR balance.

2

Replenisher acts

Anyone (usually bots) can call the forceReplenish function on your position, specifying how much DBR to add.

3

DBR is purchased at the replenishment rate

DBR is acquired and charged to your position at the replenishment rate of 54.75% APR (0.15% per day). This rate is higher than the market cost of DBR, creating an incentive for borrowers to maintain adequate DBR balances rather than relying on forced replenishment.

4

Cost added to your debt

The replenishment cost is added to your DOLA debt. Your debt increases without you receiving any DOLA. A portion of this cost (10%) goes to the replenisher as a reward, with the remainder going to the DAO Treasury.

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Example

  • You have 5,000 DOLA debt and 0 DBR remaining

  • You need 1,000 DBR to cover your position

  • The replenishment rate of 54.75% APR is applied to the value of the DBR deficit

  • The replenishment cost is added to your DOLA debt

  • If you remain in DBR deficit, replenishments can repeat, compounding your debt over time

Who replenishes positions? Similar to liquidators, automated bots monitor for zero-DBR positions and execute replenishments to earn the premium spread. They're providing a service (preventing your position from becoming invalid) but at punitive pricing meant to incentivize self-management.

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