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Synclear’s credit model is built on overcollateralization: every open loan position must be backed by collateral whose value, discounted by the applicable LTV ratio, exceeds the outstanding debt. Collateral is held in protocol-controlled escrow contracts and is only released upon full repayment or, in the event of undercollateralization, partial liquidation. Understanding how collateral is valued, how LTV ratios are applied, and how the health factor is calculated is essential for managing credit risk on Synclear.
Liquidation risk is real and irreversible. If your position’s health factor falls below 1.0 — due to declining collateral value, rising debt from interest accrual, or both — liquidators can immediately repay a portion of your debt and seize the corresponding collateral at a penalty discount. There is no grace period. Monitor your health factor continuously and add collateral or repay debt proactively to avoid forced liquidation.

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Accepted Collateral Assets

Synclear accepts a curated set of on-chain assets as collateral. Each asset class carries a distinct maximum LTV, liquidation threshold, and liquidation penalty reflecting its price volatility and on-chain liquidity depth. Max LTV is the maximum ratio of loan principal to collateral value permitted at the time of drawdown. Liquidation Threshold is the LTV at which a position becomes eligible for liquidation — slightly above Max LTV to provide a buffer. Liquidation Penalty is the additional discount applied to collateral seized during liquidation, paid to the liquidator as an incentive.
LP token collateral is subject to additional pricing methodology (TWAP-based fair value) to account for impermanent loss risk. LTV parameters for all assets are governed by the Synclear risk committee and may be updated with 48-hour on-chain notice.

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Posting Collateral

Collateral is deposited into a dedicated escrow vault contract associated with your credit line. The deposit process requires two transactions:
  1. ERC-20 approval — approve the escrow vault contract to transfer the collateral amount from your wallet.
  2. Deposit transaction — call collateralVault.deposit(creditLineId, asset, amount) to transfer collateral into escrow.
Collateral is priced using Synclear’s oracle layer, which aggregates Chainlink price feeds with a TWAP cross-check. Price updates occur on-chain and are reflected in your health factor in real time.

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Health Factor Calculation

The health factor is the primary metric for monitoring position safety. It is calculated as:
Where:
  • collateralValue is the current USD value of all posted collateral, sourced from on-chain oracles
  • liquidationThreshold is the asset-specific threshold from the table above
  • outstandingDebt is the drawn principal plus all accrued interest
A health factor above 1.0 means the position is healthy. A health factor at or below 1.0 means the position is eligible for immediate liquidation. The Borrow dashboard displays the health factor in real time and sends notifications (configurable via webhook or email) as it approaches threshold.

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Example

A business posts 10 ETH as collateral. At a current ETH price of 3,000,collateralvalueis3,000, collateral value is 30,000. Liquidation threshold for ETH is 80%.
If outstanding debt is 20,000,healthfactor=1.2—healthy.IfETHpricedropsto20,000, health factor = 1.2 — healthy. If ETH price drops to 2,600, collateral value becomes $26,000:
The position remains healthy but has significantly less buffer. A further 5% decline in ETH price would bring it near the liquidation boundary.

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Adding Collateral to Avoid Liquidation

If your health factor is declining, the fastest remediation is to post additional collateral. You do not need to close the credit line — additional collateral deposits are accepted at any time while the credit line is open.
  1. Navigate to Borrow → Your Credit Lines and select the credit line to top up.
  2. Click Add Collateral. You can add the same asset already posted or any other accepted collateral asset.
  3. Approve the escrow vault contract to spend the additional collateral amount.
  4. Confirm the deposit transaction. The health factor will update within one block of confirmation.
Alternatively, you can call collateralVault.deposit(creditLineId, asset, amount) directly from your operating contract for automated top-up logic.
Repaying a portion of the outstanding debt reduces the denominator in the health factor formula and improves your ratio immediately. Partial repayments are processed atomically — the health factor updates in the same block as the repayment transaction. See Credit Lines for repayment instructions.

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Liquidation Mechanics

When a position’s health factor reaches or drops below 1.0, it becomes available to liquidators — third-party accounts or bots that monitor the protocol for undercollateralized positions. Liquidation process:
  1. A liquidator calls liquidationEngine.liquidate(creditLineId, debtAmount, collateralAsset), specifying the debt amount they wish to repay and the collateral asset they want to receive.
  2. The protocol validates that the position is eligible (health factor ≤ 1.0).
  3. The liquidator repays up to 50% of the outstanding debt in a single transaction (the close factor).
  4. The protocol releases to the liquidator the equivalent collateral value plus the liquidation penalty discount.
  5. The position’s debt and collateral balances are updated. If health factor is restored above 1.0, no further liquidation is possible until conditions deteriorate again.
Post-liquidation: After a liquidation event, your remaining collateral and remaining debt are still associated with the credit line. The line is not automatically closed. You can repay the remaining balance and withdraw residual collateral, or continue operating the credit line within safe parameters.
The liquidation penalty is paid out of your collateral. A 10% penalty on WBTC collateral, for example, means that for every 1,000ofdebtrepaidbyaliquidator,youlose1,000 of debt repaid by a liquidator, you lose 1,100 in collateral value — 1,000tosettlethedebtand1,000 to settle the debt and 100 as the liquidator’s incentive. Avoiding liquidation through active collateral management is always preferable.