> For the complete documentation index, see [llms.txt](https://docs.indigoprotocol.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.indigoprotocol.io/readme/liquidations.md).

# Liquidations

## **Overview 🌐**

#### Understanding Liquidations

Liquidations occur when Collateralized Debt Positions (CDPs) become undercollateralized. This process ensures the stability and solvency of the protocol.

In [Indigo Protocol V3](/readme/indigo-protocol-v3.md), liquidations apply to CDPs backed by any whitelisted collateral type (ADA or CNT). Payouts to Stability Pool depositors are made in the collateral asset of the liquidated CDP.

## **Liquidation Process ⚙️**

Two-Step Procedure: Liquidations in the Indigo Protocol are automated by bots but the actual two-step process is as follows.

* **Freeze the CDP:** Once frozen, the CDP is inaccessible to its former owner, who forfeits all access and rights to it.
* **Liquidate the CDP:** The CDP's debt is settled by burning iAssets from a Stability Pool, and its collateral is proportionally distributed to Stability Pool stakers in the collateral asset type backing the loan.

## **Incentive to Liquidate 📈**

Stability Pool stakers are motivated to participate in Stability Pools as they can earn a share of the CDP's collateral. Typically, the value of the earned collateral may exceed the value of the canceled debt, especially when a liquidated CDP has a collateral value above 100% of the iAsset value.

## **Fees 💸**

* **Liquidation Processing Fee:** A percentage of the collateral that would be paid to the Stability Pool is taken and paid to the Treasury. The fee is capped to prevent Stability Pool providers from incurring a net loss (except for ADA network fees).
* **Interest settlement:** Upon liquidation, interest is minted into the interest collection script, increasing its principal. The Stability Pool then burns principal debt.