Liquidation Design
How liquidation entry, vault seizure, and LP settlement are split across Aave and Avana.
Overview
Aave is the system that decides when a position can be liquidated, but it does not know how to settle the underlying LP. Avana uses Aave for debt accounting, health checks, and the liquidation entry point, then takes over to resolve the real position that sits behind the vault collateral.
The critical design constraint is that two views of collateral must stay aligned. Aave sees an ERC-20 vault token balance, while Avana tracks the LP position that actually backs that balance. Liquidation remains sound only if seizing the vault representation always leads to the correct LP settlement path.
For the operator-facing sequence, see Liquidators. For the execution sequence, see Liquidation Flow.
Three Layers
Aave layer
Tracks debt, vault collateral balance, health factor, and the liquidation entry point that authorizes seizure.
Avana adapter layer
Receives the seized vault collateral, burns the corresponding vault token, and maps the liquidation event back to the LP position that actually backed it.
Avana settlement layer
Identifies the real LP position, runs the appropriate unwind or sale path, repays debt, pays the liquidator reward, and routes any surplus according to the market rule.
Core Rules
The main rule is simple but strict: Aave liquidates the ERC-20 vault collateral, and Avana settles the LP position behind that vault collateral. Everything else in the design exists to keep those two steps consistent.
- Vault tokens must map to real value
A liquidated vault token amount must always correspond to real LP collateral value, not a synthetic balance that cannot be recovered.
- Backing collateral cannot stay outstanding
Once the LP position is settled, the corresponding vault token must be burned so the representation does not outlive the asset it was meant to track.
- No unbacked supply
Active vault token supply cannot exist without active LP collateral behind it.
- Surplus follows the market rule
Debt gets covered first, then the liquidator reward, then settlement costs, and only then does any remaining value follow the market's surplus rule.
LP Collateral Complexity
LP-backed positions do not all behave the same way during liquidation. A fungible LP token can often be redeemed or transferred proportionally, while a Uniswap v3 NFT is a single discrete position whose range, fee accrual, and unwind route matter at the position level.
That is why the settlement layer needs to know the collateral family, the exact backing position, and the intended unwind path before it clears the matching vault supply.
Liquidation Pathways
The settlement path depends on what kind of LP collateral sits behind the vault token.
Fungible LP collateral
- • Settlement can be proportional to the debt that must be covered, rather than forcing the entire LP balance through liquidation.
- • Avana can redeem or transfer only the amount needed for the liquidation when the market design supports partial recovery.
- • The remaining position can stay active if the account still satisfies the required health checks afterward.
NFT-backed LP collateral
- • The full position moves into settlement when it is selected for liquidation because the NFT itself is the collateral unit being resolved.
- • The matching vault tokens are burned after Aave seizes the vault collateral and Avana maps that seizure back to the NFT position.
- • Avana can unwind, sell, auction, or transfer the real LP position based on the market rules for that collateral family.
- • Surplus does not automatically go to the liquidator unless the market rule explicitly says so.
Position State
ACTIVE
The position is still contributing collateral value, and the outstanding vault tokens remain fully backed by that live LP position.
LIQUIDATING
The selected collateral is no longer withdrawable by the borrower and is actively moving through the settlement path.
SETTLED
The LP position has been resolved, and the matching vault tokens must no longer be outstanding.
Surplus Handling
Settlement value is applied in a fixed order. It first covers debt, then the liquidator reward, then settlement costs. Any value left after those obligations is surplus, and that surplus follows the market rule for the collateral being settled.
If settlement value is not enough to cover the debt and reward, the market needs an explicit bad-debt path. Liquidation documentation should describe that shortfall as a real state to handle, not as something that disappears automatically.
Operator Model
Liquidations are permissionless once a position crosses the liquidation threshold. Any eligible liquidator can repay the allowed debt amount and trigger the settlement path. LP collateral is harder to unwind than simple token collateral, so Avana also accounts for specialized liquidation coverage.
- Liquidators must track the same risk state and collateral state that the protocol uses.
- Execution must remain atomic from debt repayment through settlement.
- Fee realization, route depth, and residual value should be modeled before optimizing only for speed.
- Partial coverage and full coverage are different cases and should not share the same routing assumptions.