If the collateral value decreases under a specific threshold (Collateral factor CF), the associated debt can be made available for liquidation by the smart contract. Liquidators then pay back the debt in exchange for receiving the collateral at a discount (Liquidation incentive/bonus/spread. Debt can also be rescued by “topping up” the collateral, such that the loan is sufficiently collateralized and then, the borrower can repay parts of their debt.
Hundred Finance has the following liquidation parameters:
Collateral factor CF (also known as Liquidation threshold), Close ratio set to 50%, means the liquidator can only pay 50% of the debt in a single transaction, Liquidation bonus set to 108%, means the liquidator can purchase the collateral at a 8% discount.