> For the complete documentation index, see [llms.txt](https://credit-guild.gitbook.io/introduction/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://credit-guild.gitbook.io/introduction/borrowing/liquidation.md).

# Liquidation

The Ethereum Credit Guild uses a Dutch auction system for liquidations.

There are two circumstances in which a loan can be liquidated: when enough interest accrues that total debt reaches the lending term's maximum [borrow ratio](/introduction/borrowing/lending-terms.md), or when the lending term is [offboarded](/introduction/governance/offboard-a-lending-term.md) by governance.

When a loan's collateral goes to auction, the full debt is asked, but 0 collateral is offered, essentially meaning the collateral has infinite price. Nobody would bid on this and pay the debt for nothing in return. Then, as more collateral gets offered, it might become profitable to pay the debt in exchange of the percentage of collateral that is offered, if the loan was overcollateralized. After midpoint has passed, meaning the collateral is worth less than the debt, the full collateral is offered, and less and less debt gets asked.

The first bid wins the auction.

This auction mechanism is expected to leak minimal value for the borrower, as there is no liquidation penalty, but arbitrageurs will bid in the auction only once they can get enough extra collateral to cover for their operating costs.

To avoid any penalty during liquidation, the borrower can bid on their own collateral before the auction reaches the current market price.

<figure><img src="/files/dWKxLiNcJlWM3Y2C6ywX" alt=""><figcaption><p>The ECG Dutch auction system</p></figcaption></figure>

Multiple auctions houses can be added to the system, with different midpoint & auction durations, or even different mechanisms not based on dutch auction.


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