Liquidations, Buyouts & Auctions

When a loan defaults (passes due date without repayment), the liquidation process depends on the number of tranches.

Single Tranche Defaults

Simple Process: The lender can claim the collateral directly through the GONDI dApp.

  • Requires a transaction to claim (not automatic)

  • Lender becomes the new owner of the NFT(s)

  • No additional steps or waiting periods

Multi-Tranche Defaults

Loans with multiple tranches follow a two-step liquidation process:

Step 1: Largest Lien Buyout (48 Hours)

Who gets buyout rights: The lender with the largest principal amount

  • If principal amounts are tied, the most senior tranche (ST = 0) gets priority

  • Only one lender gets buyout rights

Buyout process:

  • 48-hour window starting immediately after default

  • Buyout lender must pay all other tranches their full outstanding debt (principal + accrued interest up to default date)

  • If exercised, buyout lender can claim the collateral immediately

  • If not exercised, proceeds to auction

Step 2: Liquidation Auction (72 Hours)

When it starts: Automatically after the 48-hour buyout period expires (if no buyout occurred)

Auction mechanics:

  • 72-hour English auction

  • No starting bid minimum

  • Each bid must be 5% higher than the previous bid

  • Anyone can participate (including original lenders)

  • Bids placed with <10 minutes remaining extend auction by 10 minutes

  • Auction contract holds each bidder's funds until outbid or auction ends

Distribution of Auction Proceeds

Waterfall Priority: Senior tranches paid first, then junior tranches

Scenario 1 - Insufficient Proceeds: If proceeds < total outstanding debt:

  • Senior tranches receive priority for principal + accrued interest

  • Junior tranches receive remaining funds (may be zero)

Scenario 2 - Sufficient Proceeds: If proceeds ≥ total outstanding debt:

  • Each lender receives full amount owed (principal + accrued interest)

  • Any surplus distributed pro-rata based on outstanding debt amounts

Important Notes

  • No borrower action required: Liquidation process is automatic after default

  • No grace period: Liquidation begins immediately when loan passes due date

  • Lender participation: All lenders can bid in auctions regardless of tranche position

  • Interest calculations: All accrued interest calculated up to default date, not liquidation completion

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