> For the complete documentation index, see [llms.txt](https://docs.peapods.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.peapods.finance/liquidations-lvf/bad-debt-buffer.md).

# Bad Debt Buffer

Peapods’ LP-based collateral structure introduces inherent protection against insolvency. Because 50% of each LVF position is composed of the **paired asset** (e.g. pfUSDC), this portion is automatically seized by the liquidator and used to directly repay part of the debt.

For a liquidator to be financially incentivised to execute a liquidation, the remaining debt including the **10% liquidation bonus** must be recovered by selling the volatile side (pTKN) since the other half of the position is already secured as the debt asset.

This structure creates a **built-in price buffer**: the pTKN price can fall significantly during liquidation while still allowing the system to fully repay the liquidator and avoid any bad debt.

### **Example: Price Tolerance at Liquidation**

| **Position Value**              | **$2,000**                |
| ------------------------------- | ------------------------- |
| Paired Asset                    | $1,000 (seized directly)  |
| pTKN                            | 10 tokens @ $100 = $1,000 |
| Debt at 83.33% LTV              | $1,666.60                 |
| Liquidator Payout (110%)        | $1,833.26                 |
| Amount to Recover via pTKN      | $833.26                   |
| **Required Average pTKN Price** | **$83.33**                |
| **Lowest Wick (linear model)**  | **$66.66**                |
| **Max Drop from $100**          | **33.34%**                |

> 📌 *Assuming liquidation occurs at the 83.33% LTV threshold, pTKN can fall by up to **33.34%** to a low of **$66.66** during a linear liquidation without incurring any bad debt and whilst still providing the 10% liquidator reward.*


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