> For the complete documentation index, see [llms.txt](https://open-fi.gitbook.io/rwa-backed-lending-protocol/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://open-fi.gitbook.io/rwa-backed-lending-protocol/product-rwa-backed-lending-protocol/liquidation-process.md).

# Liquidation Process

The liquidation process in OpenFi ensures that lending markets remain solvent when borrower positions fall below required collateral thresholds. Unlike crypto-native protocols, RWA-backed lending requires a hybrid liquidation framework that combines on-chain automation with off-chain redemption.

***

#### 1. On-Chain Trigger

* Smart contracts continuously monitor borrower positions.
* Decentralized oracles (via Chainlink) provide real-time valuations for equities, gold, and money market funds.
* When a borrower’s collateralization ratio falls below the liquidation threshold, the protocol automatically flags the position for liquidation.
* Liquidators can initiate repayment of the borrower’s debt in exchange for a discounted share of the collateral tokens.

This on-chain process mirrors DeFi-native protocols (e.g., Aave, Compound), ensuring transparency and automation.

***

#### 2. Off-Chain Redemption

For tokenized RWA collateral, liquidation also requires interaction with the underlying custodian or issuer:

* Equities (xStocks): Tokenized shares must be redeemed or sold through the issuer’s redemption channel.
* Gold (MatrixDock): Tokens may be redeemed for physical reserves or liquidated via secondary trading partners.
* Money Market Funds (Asseto): NAV-based redemption occurs through the fund’s custodian, with settlement reflecting the daily NAV update.

Because redemption cycles introduce settlement lag, OpenFi uses conservative risk parameters (lower LTV, higher liquidation discounts) to protect lenders during off-chain processes.

***

#### 3. Hybrid Enforcement

The result is a two-layer liquidation model:

1. On-chain: Immediate enforcement via smart contracts and liquidators.
2. Off-chain: Redemption or secondary market settlement of tokenized assets.

This hybrid approach ensures that OpenFi can maintain trustless, automated solvency on-chain while aligning with the operational realities of off-chain financial instruments.


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