# Liquidations & Earn Deep Dive

This page explains **what a liquidation actually does** and **what Earn (Stability Pool) depositors are exposed to**.

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**Not investment advice** — Liquidations and Earn deposits are not risk-free. This page is educational.
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## At a glance

* Liquidation is a protocol action that closes or reduces unsafe debt positions.
* A liquidation changes **who holds what**: borrower debt is removed, and collateral is transferred as part of the process.
* Earn depositors can receive collateral (and reduce their USDHN deposit) during liquidations.
* Exact thresholds and fees are collateral-branch dependent and defined on-chain.

## The two user roles

### If you are a borrower

You are exposed to:

* collateral price drops (CR decreases)
* debt growth (fees/interest) over time (CR decreases)
* liquidation if your Trove becomes unsafe

### If you deposit into Earn

You are exposed to:

* your USDHN deposit being used to cancel (offset) liquidated debt
* receiving collateral assets from liquidations instead of holding only USDHN
* smart contract, oracle, and market risks

## Liquidation: what happens (high level)

When a Trove’s CR falls below the minimum for its collateral branch, liquidations can occur.

A simplified flow looks like:

1. **Trove becomes unsafe** (CR too low).
2. **Someone triggers liquidation** (liquidations are typically permissionless).
3. **Debt is canceled** using protocol-defined mechanisms (often including Earn / Stability Pool where configured).
4. **Collateral is transferred** according to those rules (often to liquidators and/or Earn depositors, plus protocol fees if applicable).
5. The Trove ends up **closed or reduced**, and the system’s bad debt is removed.

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**Mechanisms can vary** — Some CDP systems have multiple liquidation paths depending on conditions (e.g., available liquidity in Earn). The official UI reflects the current deployed rules.
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## What the borrower typically experiences

From a borrower’s point of view, liquidation usually means:

* your Trove is forcefully modified (partially or fully)
* you lose some (or all) collateral
* your debt is reduced/cleared as part of the process

Even if your debt is removed, liquidation is still a loss event because you give up collateral and may pay penalties/fees.

## What “Earn offsets debt” means (worked example)

“Offsetting” means USDHN in the Earn pool is used to cancel a matching amount of liquidated USDHN debt.

Simplified example (numbers are illustrative):

* Total Earn pool size: `10,000` USDHN
* Your deposit: `1,000` USDHN (10% of the pool)
* A liquidation occurs that offsets `500` USDHN of debt

If the pool absorbs it pro‑rata, then:

* your deposit decreases by `10% × 500 = 50` USDHN
* you receive `10%` of the collateral that came from that liquidation event (paid in the branch collateral token(s))

So after the event, you may hold:

* a smaller USDHN deposit than before, and
* some amount of collateral tokens received from liquidations

This is why Earn is not “fixed income”: it can change your asset mix.

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**Branch matters** — Earn pools can be separated by collateral branch. The collateral you receive depends on the branch’s collateral type(s).
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## Earn depositor position changes — three scenarios (numbers)

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**Simplified accounting** — The exact mechanics are defined on-chain. This section uses a pro‑rata model to make the *direction* and *magnitude* intuitive.
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### A simple model (pro‑rata)

Let:

* `pool` = total USDHN deposited in Earn *before* an event
* `you` = your USDHN deposit *before* an event
* `offset` = USDHN used to cancel liquidated debt in that event
* `collGain` = collateral delivered to Earn from that event (in collateral units)

Then a simplified picture is:

$$
you\_{after} \approx you \times \left(1 - \frac{offset}{pool}\right)
$$

$$
yourCollateralGain \approx \frac{you}{pool} \times collGain
$$

This is why Earn is not “fixed income”: your USDHN deposit can go down while collateral is paid out.

### Scenario 1 — one liquidation event

Assume:

* `pool = 10,000` USDHN
* `you = 1,000` USDHN (10% of the pool)
* a liquidation offsets `offset = 500` USDHN (5% of the pool)
* the event delivers `collGain = 250` KAIA to Earn (illustrative; assume oracle `$2/KAIA` → `$500` value)

Outcome (simplified):

* your USDHN deposit becomes `1,000 × (1 - 0.05) = 950` USDHN
* you receive `10% × 250 = 25` KAIA

Position (conceptually): `950` USDHN (deposit) + `25` KAIA (claimable/received).

### Scenario 2 — two events back‑to‑back (compounding)

Start with the same initial pool and deposit.

Event #1:

* `pool = 10,000`, `you = 1,000`
* `offset = 500`, `collGain = 250` KAIA\
  → `you = 950`, gain `25` KAIA

Event #2 (after the pool shrank):

* new pool is `9,500` USDHN, your deposit is `950` USDHN (still \~10% share)
* `offset = 1,900` USDHN (20% of the pool)
* `collGain = 950` KAIA (illustrative; `$2/KAIA` → `$1,900`)

Outcome (simplified):

* your USDHN deposit becomes `950 × (1 - 0.2) = 760` USDHN
* you receive `10% × 950 = 95` KAIA

After both events: `760` USDHN + `(25 + 95) = 120` KAIA.

### Scenario 3 — depositing more changes your exposure

Start:

* `pool = 10,000`, `you = 1,000` (10%)

Event #1:

* `offset = 200` (2%), `collGain = 100` KAIA\
  → `you = 980`, gain `10` KAIA, pool becomes `9,800`

You then deposit an additional `500` USDHN:

* your deposit becomes `1,480`
* pool becomes `10,300`

Event #2:

* `offset = 2,060` USDHN (20% of the pool)
* `collGain = 1,030` KAIA (illustrative; `$2/KAIA` → `$2,060`)

Outcome (simplified):

* your USDHN deposit becomes `1,480 × (1 - 0.2) = 1,184` USDHN
* you receive about `(1,480 / 10,300) × 1,030 ≈ 148` KAIA

After both events: `1,184` USDHN + `(10 + 148) ≈ 158` KAIA.

{% hint style="warning" %}
**What this means in practice** — Your Earn position is a changing mix of USDHN and collateral. The USD value of the collateral you receive depends on collateral price and liquidity when you later sell or hold it.
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## Why Earn APY is variable

Earn returns can change because they depend on:

* how often liquidations happen
* how large liquidations are (relative to the pool)
* protocol incentives (if configured)
* collateral prices and liquidity (what the received collateral is worth, and how easy it is to swap)

## Common misunderstandings to avoid

* “If I deposit in Earn, I only hold USDHN.”\
  → Not necessarily. During liquidations you may receive collateral assets.
* “Earn is safer than borrowing.”\
  → It is a different risk profile. You reduce liquidation risk, but take on liquidation‑absorption and collateral‑exposure risk.
* “Liquidations only matter to borrowers.”\
  → Liquidations are the main mechanism that can change Earn deposit composition.

## Next reads

* Borrower basics: [Borrowing & Liquidation](https://hann-finance.gitbook.io/hann-finance/protocol/borrowing-and-liquidation)
* USDHN + Earn overview: [USDHN & Earn](https://hann-finance.gitbook.io/hann-finance/protocol/usdhn-and-earn)
* Full risk framing: [Risk Disclosure](https://hann-finance.gitbook.io/hann-finance/risks/risk-disclosure)