Credit Liquidation Mechanism

Unlike traditional over-collateralized lending systems, HyperTrend operates under a credit-based lending system where part of the outstanding loans cannot be liquidated through conventional collateral sales. To address this, the protocol introduces a smart-contract-driven credit liquidation mechanism that enforces accountability through credit deduction and social propagation rather than asset seizure.

When liquidation is triggered, the contract automatically freezes the borrower’s account, records the default, deducts credit scores, and activates the reserve vault and social credit mechanism. Any community member may act as a Liquidator, executing the liquidation in exchange for CreditRewards — reputation points that enhance their credit score, not monetary gain.

Mathematical Model

The liquidation event is defined as a credit reallocation process:

$$S_j’ = S_j + \gamma L_i, \quad S_i’ = S_i - \delta L_i$$

Parameters:

• $S_j’$: Liquidator’s updated credit score

• $S_i’$: Borrower’s post-liquidation credit score

• $L_i$: Loan amount

• $\gamma$: Credit reward coefficient

• $\delta$: Credit penalty coefficient

To prevent abuse, liquidation rewards decay with repeated actions:

$$\gamma = \gamma_0 e^{-\lambda n_j}$$

where $n_j$ is the liquidator’s total number of successful liquidations, and $\lambda$ is the decay factor.

Liquidation Triggers

Liquidation is triggered when any of the following conditions are met:

Parameter	Condition
$S_i$	< $S_{\min}$
$\frac{V_c}{L}$	< $\mu_{\min}$
$t_{\text{overdue}}$	> $T_{\max}$

Parameter definitions:

• $S_i$: Borrower’s current credit score

• $S_{\min}$: Minimum credit threshold

• $V_c$: Current collateral value

• $L$: Loan principal

• $\mu_{\min}$: Minimum collateral ratio (e.g. 0.1)

• $T_{\max}$: Maximum overdue duration

The system continuously monitors these conditions in real time. Once any parameter breaches its limit, liquidation is automatically executed.

Liquidation Execution Logic

Step 1: Smart Contract Detection

1. The contract periodically evaluates credit and collateral metrics.

2. If conditions are met, the borrower’s account is frozen and a default record is created.

3. The contract computes the loss amount $L_i$ and triggers corresponding recovery mechanisms.

Case A: Uncollateralized Loan

• Calls the Reserve Vault to compensate the deficit;

• Activates the Social Credit Contract, deducting the inviter’s credit proportionally;

• Mints a Default SBT linked to the borrower’s DID;

• Broadcasts a liquidation event and opens for user participation.

Case B: Collateralized Loan

• The collateral is immediately sold on-chain (DEX/AMM);

• Proceeds cover principal and interest;

• If a deficit remains, the process continues as in the uncollateralized path.

Step 2: Community Liquidation

Once the event is broadcast, any qualified user with $S_j$ > 700 may execute:

$$\text{LiquidateByUser}(i, j)$$

If the contract verifies the liquidation as valid:

$$S_j’ = S_j + \gamma L_i, \quad S_i’ = S_i - \delta L_i$$

The event is recorded on-chain, updating the participant’s CreditReward history and reputation metrics.

System Significance

This mechanism represents a paradigm shift from asset-backed liquidation to reputation-driven liquidation:

• De-collateralized Enforcement: Risk resolution through credit propagation instead of asset seizure.

• Decentralized Execution: Autonomous and transparent smart contracts replace intermediaries.

• Social Accountability: Inviter networks and liquidators share collective responsibility.

• Positive Feedback Loop: Credit is used to incentivize and reinforce responsible behavior.

Through this model, HyperTrend establishes a self-regulating, self-healing credit ecosystem where every participant contributes to the network’s financial integrity and stability.