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Lenders are the most important participants in the Kamino Lend protocol. Every aspect of the risk engine is designed to ensure lenders get their tokens back. Auto-deleveraging is a last-resort mechanism — introduced by Kamino Lend contributors — that can facilitate a protocol-wide deleverage of any asset when the current supply or borrow amount is deemed too risky according to the risk framework.

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Why Auto-Deleverage Exists

Consider a scenario where an asset listed as collateral on Kamino experiences a sudden collapse in market liquidity. There are $50M of loans backed by this collateral, but the market can only absorb $5M of sell pressure without catastrophic price impact. If those loans become liquidatable, liquidators cannot execute profitably — the price impact of selling the collateral exceeds the liquidation bonus. The result: bad debt, socialized among lenders. Auto-deleverage prevents this scenario by facilitating an orderly unwinding of the asset before bad debt materializes. Instead of waiting for positions to become liquidatable and hoping liquidators can execute, the protocol proactively reduces exposure to the risky asset. This mechanism was designed in response to historical DeFi incidents:
  • Aave CRV incident: A whale accumulated a massive CRV-collateralized position. When CRV liquidity dried up, the position could not be liquidated without cascading the price further. The protocol eventually incurred bad debt.
  • Solend whale incident: A single large position threatened protocol solvency due to insufficient market liquidity to absorb a potential liquidation.
Auto-deleverage ensures Kamino has a defined protocol mechanism to handle these scenarios — rather than relying on ad hoc governance responses under crisis conditions.

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How It Works

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Triggering

Auto-deleverage is triggered by the Risk Council through a multisig vote. When the KRAF dashboard indicates that a cap change is prudent for a specific asset — due to liquidity deterioration, volatility spikes, or other risk signals — the Risk Council can initiate the deleverage process. The mechanism can also be automated in the future by taking into account various on-chain signals within the protocol.

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The 72-Hour Margin Call

Once the multisig vote passes, all affected users are notified of the deleverage event and given a 72-hour margin call period to take action. During this window:
  • No penalty is applied
  • Users can voluntarily reduce their exposure (repay debt, withdraw collateral, restructure positions)
  • If enough borrowers act voluntarily and bring exposure below the new caps, the process ends without any forced deleveraging
This margin call period is a critical design choice: it gives borrowers the opportunity to manage their own risk first, before the protocol intervenes.

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What Happens After the Margin Call

A new, reduced cap is set for the target asset. The difference between the current amount and the new cap is the amount that will be auto-deleveraged. Users subject to deleveraging see a proportional reduction in the target asset, along with corresponding tokens in their position. Deleveraging generally results in a healthier (lower) LTV ratio for the affected position. Lenders are never affected by auto-deleveraging — only borrowers.

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Collateral Deleverage

Collateral deleveraging is triggered when there is too much of an asset backing loans as collateral than can be successfully liquidated. The market liquidity for the collateral token has deteriorated to the point where liquidation would incur losses. Example: Token A deposit caps are lowered from $100M to $80M. 20% of Token A collateral must leave the system. All users with Token A supplied as collateral are notified. If a user is deleveraged:
  1. Some or all of their Token A collateral is sold on the market
  2. The proceeds repay their debt proportionally
  3. A deleverage penalty is paid to the liquidator who executes the deleverage
Supply deleverage for an asset often coincides with borrow deleverage on the same asset, since the triggers — typically an abrupt loss of market liquidity — affect both supply and borrow viability.

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Debt Deleverage

Debt deleveraging is the reverse scenario. If there is too much debt in a specific token and prices were to rise, liquidators would need to buy the debt token off the market to close positions — but if the market buy would incur slippage exceeding the debt amount, liquidation is unviable. Example: Token B borrow caps are lowered from $100M to $80M. 20% of Token B debt must leave the system. When a user is deleveraged:
  1. A portion of their collateral is sold
  2. The proceeds are used to repay their Token B debt
  3. This continues until the total Token B debt across the protocol reaches the new cap
The penalty structure is designed to incentivize borrowers to take early action — ideally during the 72-hour margin call period when no penalty applies.

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Deleverage Penalty

Deleveraged loans incur a minimum liquidation penalty of 50 basis points (0.5%). The penalty is calculated as a percentage of the deleverage amount. Example: If the penalty is 0.5% and the deleverage amount is 20% of the user’s position: 
Penalty impact = 0.2 × 0.005 = 0.001 = 0.1%
Instead of losing exactly 20% of their collateral, the user loses 20.1%.

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Penalty Escalation

The penalty continually increases until either:
  • The maximum penalty threshold is reached, or
  • The target asset deleverage cap is achieved (all excess exposure has been unwound)
The rate of increase is a function of the user’s LTV and the time elapsed since deleveraging was initiated: 
penalty = min_penalty + (current_ltv × days_since_initiation)
Worked example:
ParameterValue
Minimum penalty50 bps (0.5%)
Current LTV80%
Days since initiation3.4 days
penalty = 0.005 + (0.80 × 3.4) = 2.725%

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Penalty Cap

The maximum penalty is capped at the lowest liquidation penalty of the assets in the user’s position. For example, if a position contains SOL, USDC, and WETH with liquidation penalties of 6%, 8%, and 10% respectively, the deleverage penalty is capped at 6%. This ensures the penalty never exceeds what a standard liquidation would cost.

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Who Gets Deleveraged?

Once auto-deleveraging begins, a position is eligible for deleverage if:
  1. It contains the target asset, AND
  2. It has a current LTV that exceeds the deleverage liquidation LTV
When deleveraging begins, the target asset’s liquidation LTV is adopted as the initial deleverage_liquidation_LTV. Deleveraging starts with the highest-LTV positions and works downward.

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LTV Threshold Decrease

Over time, the deleverage_liquidation_LTV decreases automatically, expanding the pool of eligible positions: 
deleverage_ltv = liquidation_ltv − (0.0001 × slots_since_initiation / slots_per_bps)
Example (at 1 bps per hour = 7,200 slots per bps): 
deleverage_ltv = 0.80 − (0.0001 × 345,600 / 7,200) = 79.52%
This declining threshold creates urgency: users whose LTV is currently safe will eventually become eligible for deleveraging if they do not act. The mechanism encourages borrowers to voluntarily reduce their LTV — ideally during the 72-hour margin call — rather than waiting to be deleveraged at an escalating penalty.

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Key Design Properties

  • Lenders are never affected. Only borrower positions are deleveraged.
  • Orderly, not chaotic. Unlike a mass liquidation event, auto-deleverage proceeds methodically from highest-risk positions to lowest, with escalating incentives for voluntary action.
  • Not routine. Auto-deleverage is a last-resort mechanism for situations where standard liquidation cannot function. It has not been activated to date — Kamino’s track record shows $0 bad debt across all market events without needing this mechanism.
  • Preventive, not reactive. The mechanism intervenes before bad debt materializes, not after. The goal is to never reach the point where liquidation failure occurs.