Can I get liquidated if I'm on a yield farm with a layer 2 protocol?

Asked 2 years ago

I've become accustomed to investing in crypto with bitcoin blockchains using layer 1 network liquidity pools. I'm someone who doesn't take too readily to changes, and although this layer 2 is said to have a faster transaction time, I'm worried that the risk of forced liquidation and losing money may be greater.

Marco Bryan

Saturday, August 06, 2022

Yes, you can get liquidated because liquidation is not based on the chain you use. When you open a leveraged position with a layer 2 protocol, the assets you deposit in the protocol act as collateral, which increases as you accumulate yields.

The collateral must exceed the amount you owe the lender (plus a margin of safety to take care of quick price swings), or the protocol may close your trade to pay back the lender – forced liquidation. You should avoid forced liquidation by depositing more funds because if you are force liquidated, 5% of your remaining position would be paid to the liquidator bot as a reward for managing your position and ensuring the lender was paid.

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