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Mero debt repayments are a debt management tool that borrowers can use to efficiently repay a portion, or the entirety, of their debt. When a debt repayment occurs, it increases the health factor of the associated loan, mitigates liquidation risk, and decreases the cost to borrow.
Debt repayments are personalized to the user. Meaning, users select specific parameters that best match their desired conditions. Anyone who holds Mero LP tokens can register debt repayments. Liquidity that is registered for debt repayments stays in Mero pools where it continues to earn yield up until the very moment user-defined triggers are met and a debt repayment is made.
In this example a user is borrowing $37,500 of ETH against $50,000 of DAI as collateral on Aave. This is a risky loan with a health factor of 1.066. In order to mitigate liquidation risk, the user registers the following debt repayments:
Health factor: 1.05 Single debt repayment: $2,500 Total debt repayment: $10,000
At some point in time ETH increases in value which causes the Aave loan to become less collateralized. This negatively impacts the loan-to-value (LTV) or collateralization ratio of the loan and decreases the health factor (health factor < 1 = eligible for liquidation).
When the user's loan hits a health factor of 1.05 a Mero keeper immediately reports this to the Mero smart contract which then executes a debt repayment. $2,500 is taken from the Mero user's liquidity (which has been earning yield) and uses it to make a debt repayment. This increases the health factor of to 1.123 which prevents possible liquidation and greatly increases the safety level of the loan.
Once registered, debt repayments are entirely automated for users and will continue to occur (if triggered) until the user unregisters their Mero liquidity or lacks sufficient funds.
This example demonstrates how the Mero protocol can be used to manage debt precisely and mitigate liquidation risk. The user was able to borrow at a high, or risky, LTV ratio while ensuring that their loan would be sufficiently collateralized in the event that it becomes at risk. Furthermore, the user was able to realize the benefit of Mero pools and earned yield up until the very moment their funds were needed to make a debt repayment.