Liquidation Design
How liquidation entry, vault seizure, and LP settlement are split across Aave and Avana.
Overview
Aave determines liquidation eligibility and handles debt accounting and seizure of the ERC-20 vault collateral. Avana maps that collateral to its backing LP position and executes the settlement method required by the LP format. Liquidation connects two representations of the same collateral: the vault token balance recorded in Aave and the backing LP position tracked by Avana. Seizure of the vault token must resolve to the corresponding LP position so settlement removes both the backing position and its collateral representation consistently.
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 liquidation process links Aave's seizure of ERC-20 vault collateral to Avana's settlement of the backing LP position. The rules below describe the relationship between vault supply, recoverable collateral, and settlement proceeds.
- Vault tokens must map to real value
Each amount of vault collateral selected for liquidation must correspond to recoverable value in its backing LP position.
- Backing collateral cannot stay outstanding
Settlement removes the LP position from active collateral. The corresponding vault tokens must also be burned so they cannot continue representing collateral that is no longer held.
- No unbacked supply
Active vault token supply cannot exist without active LP collateral behind it.
- Surplus follows the market rule
Settlement proceeds cover debt first, followed by the liquidator reward and settlement costs. Any remaining value is distributed under 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. The settlement layer uses the collateral family, backing-position identifier, and configured unwind route to resolve the position and clear its corresponding 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
The position is still contributing collateral value, and the outstanding vault tokens remain fully backed by that live LP position. The selected collateral is no longer withdrawable by the borrower and is actively moving through the settlement path. 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 recoveries are insufficient, a shortfall remains after settlement. It requires the market's bad-debt handling; completing the LP unwind does not itself eliminate the unpaid obligation.
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.
- Execution estimates include fee realization, route depth, and residual value, as well as transaction timing.
- Partial and full debt coverage require different routing amounts and recovery estimates.