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