Liquidation is determined by liquidation collateral factors, which are separate and higher than borrow collateral factors (used to determine initial borrowing capacity), which protects borrowers & the protocol by ensuring a price buffer for all new positions. These also enable governance to reduce borrow collateral factors without triggering the liquidation of existing positions.
When an account’s borrow balance exceeds the limits set by liquidation collateral factors, it is eligible for liquidation. A liquidator (a bot, contract, or user) can call the absorb function, which relinquishes ownership of the accounts collateral, and returns the value of the collateral, minus a penalty (liquidationFactor), to the user in the base asset. The liquidated user has no remaining debt, and typically, will have an excess (interest earning) balance of the base asset.
Each absorption is paid for by the protocol’s reserves of the base asset. In return, the protocol receives the collateral assets. If the remaining reserves are less than a governance-set target, liquidators are able to buy the collateral at a discount using the base asset, which increases the protocol’s base asset reserves.