Partial liquidations

A falling BTC price or growing debt can make a position liquidatable. Zest Protocol V2 uses transactions the customer authorized in advance to settle covered outcomes while preserving collateral not needed for the settlement.

The customer fixes the permitted Bitcoin payouts in advance. Independent guardians then review settlement against the position’s actual conditions.

Partial liquidation preserves collateral

A partial liquidation pays a fixed settlement amount and creates a real V2 remainder vault. Ethereum reduces the same position’s collateral and debt.

The deposit does not need to be split into separate vaults in advance to make this partial settlement possible. The remainder’s further transactions are pre-authorized against its exact outpoint. The borrower does not have to return online for the remaining loan to retain its covered liquidation paths.

The remaining loan stays open. Its updated debt, collateral and health factor show whether repayment or additional collateral is needed.

One output becomes a settlement and a remainder

Consider an illustrative pre-signed transaction spending a 1,000,000-sat vault. If its fixed settlement output is 300,000 sats and its total transaction fee is 1,000 sats, 699,000 sats remain for the new vault. This simplified accounting example assumes no additional outputs; an actual package must also include any anchors and other committed allocations. It is not a liquidation quote or a runnable template.

The executor cannot replace 300,000 with a percentage calculated when it broadcasts. The transaction already fixes those amounts. Ethereum must account for the actual settlement and the debt left outstanding under its lending rules.

The meaningful result is that one vault can support a partial liquidation and leave a new Bitcoin vault backing the continuing loan. It is not necessary to liquidate an entire vault merely because Bitcoin inputs are atomic.

What authorizes liquidation?

The applicable oracle event and debt conditions must match a pre-signed outcome. Its input must exist and remain unspent, and any Bitcoin delay must be satisfied.

The executor completes the authorized signature and broadcasts the transaction. The Bitcoin amounts and destinations were fixed at signing; they are not chosen at execution.

Ethereum still calculates and checks debt-accounting changes under the lending rules. That accounting does not authorize an executor to rewrite the Bitcoin payout.

Settlement and watchdog review

Production V2 separates outcome stamping from watchdog review. Its settlement design includes:

• A fast path for a clean settlement acknowledged by the council.
• A claimant path after the configured contest delay.
• A bounded reversal path that returns an invalid settlement to a vault rather than to a council payout address.

Guardian review protects the Bitcoin payout during the contest window. Guardians check the liquidation against independent position evidence and complete the prescribed return when it is invalid. A confirmed reversal returns the contested BTC to the vault and prevents collection through the liquidator’s delayed path. See Trust assumptions for the quorum and timing requirements.

Terminal liquidation and surplus

When a covered terminal transaction spends the remainder, its signed outputs specify the settlement and any BTC returned to the customer. Ethereum separately accounts for the debt actually repaid and any refund in the borrowing asset.

The final Ethereum account balance records any debt still outstanding, including interest beyond the signed coverage.

Fees and anchor outputs are included in that arithmetic. The executor cannot later redirect the surplus or increase a payout beyond the signed transaction.

Keep track of the continuing position

The grid covers defined price and debt conditions. Production renewal keeps those terms current as the position changes. Borrowers should monitor their health factor and respond to coverage updates; BTC market movements still affect the loan.

When repayment, withdrawal or settlement is pending, the position reflects confirmed outcomes on both chains. Review the updated debt, collateral and any outstanding actions before making the next change.

The two-CET demo proves a partial liquidation and a continuing remainder with two grid signatures. Production extends that mechanism across a broader set of outcomes.