Loans in crypto have historically been all-or-nothing; once the liquidation threshold is surpassed, the loan will be liquidated in its entirety and the borrower will be subject to a penalty. We believe this is predatory and there is a better solution.
Deepwaters Vault offers a partial liquidation mechanism, which can be opted into when a user takes out a loan or can be toggled on for existing loans. The partial liquidation functionality protects users from complete, binary liquidations when enabled.
When partial liquidation is opted into, Deepwaters Vault instead takes a portion of the collateral if the liquidation threshold is surpassed. If the value of the collateral, in relation to the value of the borrowed assets, continues to decrease, then partial liquidations will continue in a stepwise manner.
This mechanism ensures borrowers do not lose their entire position because the market moves against them. For liquidity providers, this can provide additional yield as opting into partial liquidation incurs a modest increase in the interest rate of the loan.