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

# Example

Imagine you’re following a real-world scenario where Alice uses her BTC as collateral and things don’t go as planned. Here’s what happens step by step:

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1\. Vault Setup

* Alice deposits $800 of BTC into a vault.
* She borrows 500 UNIT (the maximum allowed) and spends it outside of Ducat.

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2\. Market Drop

* BTC’s value falls by 15.7% in one minute.
* The vault’s BTC is now worth $674.40, which is too low to safely back 500 UNIT under the 135% collateralisation requirement.

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3\. Liquidation Tax

* The protocol applies a 15% liquidation tax (about $101.16 of BTC) to the vault, which is escrowed.
* After the tax, the vault holds $573.24 of BTC, still backing the 500 UNIT debt.

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4\. Liquidator Action

* Bob, a Liquidator, steps in by adding $226.76 of BTC to bring the vault back to the required 160% collateralisation level.
* In effect, Bob takes on Alice’s $500 debt and gains control of a vault holding $573.24 in BTC. This gives him a net asset value of $73.24.

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5\. Liquidation Rebate

* In this example, Bob recapitalises the vault at a collateralisation level of 134.88%. Since the liquidation rebate does not begin until the vault falls below 124%, Bob does not receive any rebate from the protocol.

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6\. Bob’s Return

* To withdraw the BTC from the vault, Bob must first repay the 500 UNIT debt by purchasing UNIT on the open market.
* Assuming a UNIT/USD exchange rate of 1.00, the cost to acquire 500 UNIT is $500.
* Bob’s profit from recovering the BTC (after taxes and rebate) is $73.24, as calculated in Step 4.
* His total cost is $500 to acquire UNIT, plus $226.76 to recapitalise the vault, totalling $726.76.
* Bob earns a profit of $73.24 on a total investment of $726.76, giving him a return of approximately 10.1%.

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7\. Protocol’s Role

* The protocol retains the liquidation tax revenue, after paying out any rebate.
* In more distressed vaults, the protocol may share a larger portion or all of the liquidation tax with the Liquidator to offset higher risk.

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This breakdown shows how a sudden market drop can trigger liquidations and create opportunities for Liquidators like Bob, while the protocol uses liquidation taxes and rebates to manage the risk of bad debt accumulation.