# Managing Murabaha

#### Understanding Liquidations&#x20;

Liquidations can occur for two reasons. Either the debt has reached **expiry** or the **Debt to collateral ratio** reaches to a level that is equal to the liquidation threshold.&#x20;

A users **DTC (Debt to Collateral ratio)** represents the value of your debt with respect to the the value of your collateral (all in USD terms) and is displayed before execution and post execution in the portfolio section.  Each collateral type has its own Max DTC, Liquidation threshold and Liquidation bonus. For users with a mix of collateral types, a weighted average is deduced for the Max DTC, Liquidation Threshold and Liquidation bonus.&#x20;

The **liquidation threshold** represents the DTC ratio that would trigger a liquidation event. For example, assume some user has a debt value of $2,000 and collateral worth $10,000. This would equate to a DTC of 20%  (which is a low risk position). Assuming the liquidation threshold is 80%, if the value of the collateral would drop to $2500 the position would be liquidated because the value of the debt is now worth 80% of the collateral's value.&#x20;

A **liquidation bonus** is also allocated to the liquidator, it is based on the difference between the collateral value and the debt value. In this scenario a bonus of 50% would be charged on the difference of $500, leaving the user with $250 worth of collateral.&#x20;

It is similar for positions that use stable coins as collateral and have a volatile currency as debt. For example, if a user has a ETH debt currently valued at $2000 and 10,000 USDT as collateral (DTC 20%). Assuming the liquidation threshold is 80%, a liquidation on the USDT collateral would be triggered if the value of ETH rises to $8000.  &#x20;

Users should monitor the health of their positions and **top up** collateral to avoid liquidation in the event of broad market price movements. Users can monitor and manage all positions (Murabaha's, pool deposits, other) in the Portfolio section of the UI. Users can also **remove collateral** as long as:

i) it doesnt result in the users DTC exceeding the max DTC for the user&#x20;

If the user has repaid all debts then 100% of the collateral can be withdrawn. &#x20;

In the event of a **debt reaching its expiry** collateral will be liquidated in a similar manner using the approach described in the 'Liquidation Mechanics'. But in general a user can assume that depending on their DTC, they will be left with much more collateral than in a price liquidation. For example, assuming the same scenario where the user has a debt value of $2,000, collateral worth $10,000, a DTC of 20% and liquidation threshold is 80%. If the debt has reached expiry, a portion of collateral equal to the debt will be given to the liquidator + the liquidation bonus. In this scenario, the collateral would initially be deducted by $2000 and then a bonus of $250 would be deducted from the collateral leaving the user with $7,750 in collateral.&#x20;

With regards to 'Time Based Liquidations', it is important to note that each debt is unique. Assuming the same scenario, a user may have various USDT debts each expiring at different times and hence each will be treated separately.

#### Managing Repayments&#x20;

Users can **repay their Murabaha debt over time reducing the amount owed** on expiry. However, any repayments of debt that are within 24 hours of the expiration time must clear the outstanding debt on the unique Murabaha. For example, if a user had a debt of 10,000 USDT and repaid 7000 USDT over time, **partial repayment of the outstanding** 3000 USDT **will not be accepted during the 24 hour window to expiry**. Once the debt reaches the 24 hour window, the remaining 3000 USDT must be repaid. &#x20;

It may be tedious for a user to repay the exact amount of their debt especially if it is in decimals. For example, a users debt may be 10,231.678 USDT. In such cases, the system allows for users to round up but not down. Hence, the user can repay 10,232 USDT but not 10,231 USDT.&#x20;

{% hint style="info" %}
**Although a Murabaha takers debt is fixed for the duration of the debt, reducing the Murabaha debts owed to a given azPool may support maintaining the eligibility requirement for vAZKA rewards. As your debt reduces so does the likelihood of your dLP value being within the eligibility requirement. For this reason Murabaha takers are incentivised to reduce their debts over time.** &#x20;
{% endhint %}

#### Parrallel Murabaha

If a user is unable to repay their debt on time, they can utilise a **Parallel Murabaha** to extend the timeline for repaying an existing debt. Let's say a user has an initial debt of $2,000 in USDT, backed by $10,000 in ETH collateral, resulting in a Debt-to-Collateral Ratio (DTC) of 20%. If the user wants to rollover this debt, they can; using the RAC calculation + some safety buffer; initiate a new Murabaha contract for some amount of UNI that is equal to the existing debt. Assuming this debt incurs Murabaha fees that total $100, a new debt of $2,100 will be incurred. This would temporarily raise their DTC to 41% as the user now has two separate debts that equal 4100 USDT in total. Upon execution; provided the DTC is below the predetermined maximum DTC;  the user can execute the Murabaha, receive UNI tokens, and promptly sell them for $2,000 in USDT. These funds can then be used to clear the original debt, leaving the user with the new $2,100 debt and lowering their DTC back to around 21%. The users new debt of 2100 USDT will have a new expiration date. However, the strategy comes with risks: getting close to the maximum DTC could trigger a liquidation due to market fluctuations before the original debt is repaid.     &#x20;
