How liquidation works on Recoup

Can my Recoup loan be liquidated?

Yes. There is exactly one trigger: your LTV rising above 50%, meaning your debt is more than 50% of your collateral's value.

On Recoup you deposit DexFi Treasury Bonds as collateral and borrow USDC against them. The bonds pay USDC yield most weeks, and part of that yield is applied to your debt, so the debt never grows on its own; only borrowing more adds to it. There is no interest rate and no required repayment. Missing a payment cannot liquidate you, because there are no payments to miss.

What can liquidate you is the value of the collateral. Recoup values each bond at its NAV (net asset value): what one bond is worth to the protocol, worked out from the DexFi treasury that backs it and posted on-chain about once a day. If NAV falls far enough, a loan that was comfortable when you took it can cross the line.

What is LTV and what counts as a safe position?

LTV (loan to value) is your debt as a share of what your collateral is worth, and you can borrow up to 25% at launch while liquidation only starts once it is above 50%.

If your bonds are worth $10,000 and you owe $2,500, your LTV is 25%. The gap between the most you can borrow and the point where liquidation starts is deliberately wide. Both figures are launch settings: the protocol can adjust them only inside bounds fixed in its contracts.

Your LTV moves for three reasons. Weekly yield pays the debt down, which lowers it. A fall in NAV makes the collateral worth less, which raises it. Borrowing more adds to the debt, which raises it too. Recoup never adds interest or fees to the debt, so if you have not borrowed more, a rising LTV means the collateral lost value.

What is a health factor?

The health factor is the liquidation threshold divided by your current LTV: at or above 1.00 the position cannot be liquidated, and once it drops below 1.00 the position can be auctioned.

A loan at the 25% ceiling has a health factor of 2.00. The number rises on its own as yield pays the debt down, and falls if NAV falls or you borrow more. The app always shows it with a text badge, never colour alone: SAFE, AT RISK as it approaches the line, LIQUIDATABLE past it, and CLEARED once the debt is zero.

What happens if the bonds' value falls?

Your LTV rises and your health factor falls, but a loan taken at the 25% ceiling only goes past the liquidation line if NAV falls by more than 50%.

NAV depends on DexFi's treasury, which is exposed to crypto markets, so a large fall is possible. Borrowing less than the maximum widens the margin further, and every week of yield widens it a little more. Nothing is sold while the position stays on the safe side of the line.

How does a Dutch auction liquidation work?

A Dutch auction starts at a high price and lowers it over time until someone buys; on Recoup the price starts at 100% of NAV and falls to 68% of NAV over 6 hours.

1. Your LTV goes above the 50% line. Anyone can open the auction. If your loan carries a liquidation deposit (explained below), it is set aside for whoever opened it.
2. Your whole bond balance is taken as one lot. Recoup does not sell just enough to clear the debt.
3. The price of the lot starts at 100% of its NAV and falls steadily to a floor of 68% over 6 hours.
4. The first bidder to accept the current price buys the whole lot.
5. The proceeds repay your debt first. A 5% penalty on the debt is then taken from what is left, as far as it goes, and split between whoever called the liquidation and the insurance fund.
6. Whatever is left over, the surplus, is returned to you.

If the proceeds do not cover the debt, the shortfall is met in order: the auction proceeds, then the insurance fund, then lenders, through a lower pool share price.

What does a liquidation cost me?

At least the 5% penalty on your debt, and often far more, because the whole position is sold at whatever discount the auction reaches.

Take a position just past the line: $10,000 of bonds at NAV and $5,100 of debt. If the lot sells at the 100% starting price, the sale raises $10,000, the debt and a $255 penalty are paid, and $4,645 comes back to you. With the $25 liquidation deposit going to whoever opened the auction, you lose $280. If it sells at the 68% floor, the sale raises $6,800 and only $1,445 comes back. Counting the deposit, you have lost $3,480 of the value you had in the position, not $255.

What if nobody bids?

If the auction runs its 6 hours without a buyer, the lot can be moved to a workout. There the protocol owner decides where the bonds go once the workout closes, and they may never come back to you.

As soon as the 6 hours are up without a fill, anyone can move the lot to the workout. Anyone can instead restart the lapsed auction at the current NAV, but only within 48 hours of the auction first opening; after that only the workout remains. In the workout the owner can recover value through DexFi's own manual redemption, and chooses where the lot is sent: to the redemption counterparty, or back to you. Repaying your debt in full while the lot is in the workout closes the loan, but it does not by itself return the bonds.

The workout cannot hold the debt open forever. After 14 days, anyone can force it closed, and whatever debt is still owed is written down as a loss, borne by the insurance fund first and then by lenders.

What is the liquidation deposit?

It is a $25 deposit taken out of the borrow that first takes your debt to $500 or more, and it is refunded when your debt reaches zero.

• It is withheld from the USDC you receive, not added to what you owe.
• When an auction opens on your position, the deposit is set aside for whoever opened it, so that someone always has a reason to start one. They are paid only if the auction fills or the lot moves to the workout.
• If the auction is cancelled, for example because your position recovered, the deposit goes back to you and stays held against the loan.
• If your debt is paid off without a liquidation, you get it back.

How can I stay safe?

Borrow well below the maximum, watch your health factor, and repay by hand if NAV falls.

• Borrow less than you can. The 25% ceiling is a limit, not a target. A smaller loan needs a bigger fall in NAV before it goes past the line.
• Watch the health factor and its badge. An AT RISK badge means the position is getting close to the line.
• Repay manually at any time. Yield pays the debt down most weeks, but you can also repay part or all of it yourself whenever you like, which lowers your LTV straight away.

Recoup runs on Base Sepolia testnet only for now, so none of this involves real funds yet. The 33Labs audit of the lender pool source finished in September 2026; the report is on the security page. The liquidation auction and the borrowing contracts were outside that audit's scope. For the terms used here, see the glossary.