Liquidation Mechanism: Phases 1 & 2 (core + DEX)

.github/workflows/cadence_tests.yml

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 name: CI
 
 on:
+  workflow_dispatch:
   push:
     branches:
       - main
@@ -28,11 +29,15 @@ jobs:
           restore-keys: |
             ${{ runner.os }}-go-
       - name: Install Flow CLI
+        env:
+          FLOW_CLI_VERSION: v2.7.2
         run: sh -ci "$(curl -fsSL https://raw.githubusercontent.com/onflow/flow-cli/master/install.sh)"
-      - name: Flow CLI Version
-        run: flow version
-      - name: Update PATH
-        run: echo "/root/.local/bin" >> $GITHUB_PATH
+      - name: Update PATH and show Flow version
+        run: |
+          echo "/root/.local/bin" >> $GITHUB_PATH
+          echo "$HOME/.local/bin" >> $GITHUB_PATH
+          which flow || true
+          flow version
       - name: Install dependencies
         run: flow deps install --skip-alias --skip-deployments
       - name: Run tests

LIQUIDATION_MECHANISM_DESIGN.md

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+## Tidal Protocol — Production Liquidation Mechanism (DEX + Keeper + Auto)
+
+### Objectives
+- **Safety**: Permissionless, incentive-aligned liquidations that reliably resolve undercollateralized positions.
+- **Coverage**: Dual paths — a direct repay-for-seize (keeper provides debt tokens) and a protocol-executed DEX path — plus an automatic DEX liquidation scheduler; no auction fallback.
+- **Determinism**: Predictable math, oracle guards, and invariant checks.
+- **Observability**: Rich events and view endpoints for keepers/frontends.
+
+### Current foundations (in contract)
+- **Risk math**: `healthFactor`, `effectiveCollateral`, `effectiveDebt`, per-token factors; `RiskParams` includes `liquidationBonus`.
+- **Position config**: `InternalPosition` has `minHealth`, `targetHealth`, `maxHealth`, optional `topUpSource` and `drawDownSink`.
+- **Oracle connectors**: `DeFiActions.PriceOracle` (Band Oracle impl supports staleness checks).
+
+### Out-of-scope for this phase
+- Multi-oracle medianization (can be added later).
+- Insurance module for bad debt (can be added later, we expose hooks).
+
+## Architecture
+
+### Liquidation paths
+- **Permissionless repay-for-seize (Keeper)**: A keeper repays the borrower’s debt and receives collateral with a bonus. Only the exact amount needed to reach the liquidation target health is used; any excess allowance is ignored.
+- **Protocol-executed DEX**: Protocol seizes collateral, swaps via allowlisted DEX connector into debt asset, repays debt, and returns any remainder appropriately.
+
+### Routing policy (DEX-first with keeper override)
+1) Attempt `topUpSource` pull if present to restore health above the trigger (≥ 1.0).
+2) If still unhealthy and outside warm-up: compute the DEX route and quote the effective collateral-per-debt price.
+3) If a keeper presents an offer that is strictly better than the DEX route (i.e., requires less collateral per unit of debt repaid), route to keeper; otherwise execute via DEX.
+4) Additionally, run an automatic DEX liquidation on a timer (or keeper-triggered automation) so that positions are liquidated even without explicit keeper participation, subject to oracle/DEX deviation guards.
+
+## Governance parameters
+- **Per-token (or global defaults)**
+  - **collateralFactor** (exists)
+  - **borrowFactor** (exists)
+  - **liquidationBonus** (exists; percent added to seize quote)
+  - **twapWindowSec**, **maxDeviationBps** (oracle guards)
+  - **dustThresholdCredit**, **dustThresholdDebt**
+- **Global**
+  - **liquidationTriggerHF** = 1.0e18 (health strictly below this triggers liquidation; constant)
+  - **liquidationTargetHF** (e.g., 1.05e18 or 1.10e18; exact health to reach post-liquidation)
+  - **dexMaxSlippageBps**, **dexMaxRouteHops**
+  - **dexOracleDeviationBps** (max allowed deviation between oracle price and DEX mid/quote)
+  - **fees**: `protocolLiquidationFeeBps`, `keeperBountyBps`, `feeSink`
+  - **connector allowlists**: `allowedSwappers`, `allowedOracles` (by component ID)
+  - **circuit breakers**: `liquidationsPaused`, `liquidationWarmupSec` (warm-up delay after unpause when liquidations remain disabled)
+  - **position health spacing** (validation rule): enforce `1.0 < min < target < max` with minimum spacing (e.g., ≥ 5% between bounds) for user-configured thresholds; not used by liquidation.
+
+### Storage additions
+- **`liquidationParams`** struct stored in pool.
+- **Connector allowlists** and **fee sink** capability path.
+- **`lastUnpausedAt: UInt64?`** to compute warm-up window (`liquidationWarmupSec`).
+
+### Events
+- **LiquidationParamsUpdated(poolUUID, targetHF, warmupSec, protocolFeeBps)**
+- **LiquidationsPaused(by)** / **LiquidationsUnpaused(by, warmupEndsAt)**
+- **LiquidationExecuted**(pid, liquidator, debtType, repayAmount, seizeType, seizeAmount, bonusBps, newHF)
+- **LiquidationExecutedViaDex**(pid, seizeType, seized, debtType, repaid, slippageBps, newHF)
+- **AutoLiquidationExecuted**(pid, route, debtType, repaid, seizeType, seized, newHF)
+- **BadDebtWrittenOff**(pid, shortfall)
+
+## Math and quoting (pure helpers)
+- **Eligibility**: `health(view) < liquidationThresholdHF`.
+- **Required repay to reach target**:
+  - Compute the exact repay needed to move `health` to `liquidationTargetHF` given current snapshots.
+  - If a keeper supplies more than required, only the required amount is used.
+- **Seize for repay** (single collateral type):
+  - Let `R = repayTrueAmount` in debt token, `P_d = price(debt)`, `P_c = price(collateral)`, `BF = borrowFactor(debt)`, `CF = collateralFactor(collateral)`, `LB = (1 + liquidationBonus)`.
+  - Debt value basis = `(R * P_d) / BF`.
+  - Seize amount = `DebtValue * LB / (P_c * CF)`.
+- **Collateral selection**: choose collateral with highest effective value and available balance, unless a hint is provided.
+- **Quote**: `quoteLiquidation(pid, debtType, seizeType?) -> {requiredRepay, seizeType, seizeAmount, newHF, route=Keeper|DEX}` including DEX-vs-keeper price comparison when keeper input is provided.
+
+## Entrypoints (new public API)
+- **View**
+  - `isLiquidatable(pid) -> Bool`
+  - `quoteLiquidation(pid, debtType, seizeType?) -> Quote`
+  - `getLiquidationParams() -> LiquidationParams`
+- **Permissionless actions**
+  - `liquidateRepayForSeize(pid, debtType, maxRepayAmount, seizeType, minSeizeAmount)` (requires `maxRepayAmount ≥ requiredRepay`)
+  - `autoLiquidate(pid, debtType, seizeTypeHint?, routeParams?)` (DEX path; callable by any keeper/cron executor)
+- **Keeper/governance**
+  - `liquidateViaDex(pid, debtType, seizeType, maxSeizeAmount, minRepayAmount, routeParams)`
+  - `setLiquidationParams(params)`
+  - `setConnectorAllowlists(swappers, oracles)`
+  - `setFeeSink(sink)`
+  - `pauseLiquidations(flag)`
+
+## Execution flows
+
+### Repay-for-seize (permissionless)
+- Preconditions: liquidations not paused; past warm-up if recently unpaused; fresh indices for involved tokens; oracle staleness/deviation checks incl. DEX-vs-oracle deviation; `health < 1.0e18`.
+- Steps:
+  - Compute `requiredRepay` to reach `liquidationTargetHF`.
+  - Require `maxRepayAmount ≥ requiredRepay`; transfer exactly `requiredRepay` from keeper; reduce position debt.
+  - Compute `seizeAmount` with bonus; withdraw from position’s collateral; transfer to liquidator.
+  - Apply fees/bounties from seized amount if configured; emit `LiquidationExecuted`.
+- Postconditions: health increases; no negative balances; dust rules applied.
+
+### Via DEX (protocol executes swap)
+- Preconditions: same as above + swapper allowlisted + slippage bounds + DEX-vs-oracle deviation within `dexOracleDeviationBps`.
+- Steps:
+  - Seize up to `maxSeizeAmount` collateral to an internal temporary vault.
+  - Swap seized collateral → debt token via `SwapConnectors.Swapper` with `minOut` based on slippage.
+  - Repay debt with swap output; handle any leftover collateral (return to position or fees/sink per params).
+  - Emit `LiquidationExecutedViaDex`.
+- Security: snapshot → seize → external call → state mutate → emit; never pass borrower’s resources directly out.
+
+### Auto liquidation (DEX timer)
+- A scheduled or keeper-triggered automation repeatedly scans for undercollateralized positions and calls `autoLiquidate` using the DEX path, subject to the same oracle/DEX deviation and warm-up rules.
+- Events: `AutoLiquidationExecuted` per position.
+
+## Oracle safety and indices
+- Use oracle with `staleThreshold`, per-token TWAP window, and `maxDeviationBps` guard vs last snapshot.
+- Additionally enforce `dexOracleDeviationBps`: the DEX spot/TWAP price used for liquidation must be within this deviation vs oracle price, else revert.
+- Accrue interest indices for involved tokens on-demand before quoting/execution.
+
+## Invariants and safety checks
+- Liquidation only when `health < threshold` and not paused.
+- Post-liquidation: `health ≥ pre.health`.
+- Balances never negative; dust thresholds applied.
+- Fees ≤ seized amount; fee sink receives expected amount.
+- Throttles: per-tx close factor, optional per-block liquidation cap, single active auction per pid.
+
+## Scripts and transactions to add
+- Scripts: `quote_liquidation.cdc`, `get_liquidation_params.cdc`.
+- Transactions: `liquidate_repay_for_seize.cdc`, `liquidate_via_dex.cdc`, `auto_liquidate.cdc`.
+- Governance tx: `set_liquidation_params.cdc`, `allow_swapper.cdc`, `pause_liquidations.cdc`.
+
+## Testing strategy
+- Unit (pure math): seize calculation vectors; HF monotonic increase on liquidation; close-factor clamping; rounding bias toward protocol.
+- Scenarios: price drop → repay-for-seize; DEX route vs keeper offer routing; stale oracle rejection; DEX-vs-oracle deviation rejection; warm-up blocking; top-up source prevents liquidation; bad-debt write-off path.
+- Fuzz/property: random portfolios and prices; repeated partial liquidations; assert invariants each step.
+
+## Rollout phases
+- **Phase 1**: Params (incl. warm-up, target HF), view quotes, `liquidateRepayForSeize` + tests/events.
+- **Phase 2**: `liquidateViaDex` with an allowlisted swapper + slippage/deviation guards + tests.
+- **Phase 3**: Auto liquidation scheduler + keeper example + monitoring dashboards.
+- **Phase 4**: Security review, gas profiling, parameter calibration; optional insurance fund integration.
+
+## Open questions
+- Single-asset seize per call vs multi-asset? (recommend single per call)
+- Default `liquidationTargetHF` (1.05 vs 1.10) and warm-up duration defaults
+- Keeper offer format standardization for price comparison (quote units)
+- Reserve/insurance module hookup for bad debt.
+
+## References
+- High-level design (Notion): https://www.notion.so/Liquidation-Mechanism-in-Tidal-23a9c94cfb9c8087bee9d8e99045b3d9
+- Implementation doc (this branch): https://github.com/onflow/TidalProtocol/blob/feature/liquidation-mechanism/LIQUIDATION_MECHANISM_DESIGN.md
+
+## Liquidation policy (Phase 1)
+- **Target health factor (HF):** `liquidationTargetHF = 1.05e24`.
+- **Trigger condition:** Liquidation is only allowed when current HF < 1.0e24.
+- **Quote behavior (`quoteLiquidation`):**
+  - **If feasible:** Return the unique pair `(requiredRepay, seizeAmount)` that moves the position to HF ≈ `liquidationTargetHF` using the minimal necessary repayment and collateral seize.
+  - **If infeasible (insolvency):** Return the pair that maximizes HF subject to `seizeAmount ≤ availableCollateral`. If reaching the target is not possible but solvency is, the quote should move HF to ≥ 1.0e24 (as close to target as allowed). If even solvency is not achievable, the quote must strictly improve HF while remaining < 1.0e24. Do not exceed available collateral.
+  - **No over-reward:** The quote never recommends seizing more collateral than required by the target (or insolvency boundary). Extra repayment must not increase seized collateral.
+  - **Monotonicity:** As price worsens, `requiredRepay` must not decrease. As price improves, `requiredRepay` must not increase (for the same state).
+  - **Rounding:** Round conservatively so post-quote execution is not below target due to rounding; small “at or above target” tolerance is acceptable.
+- **Execution behavior (`liquidateRepayForSeize`):**
+  - Uses the quote and takes **exactly** `requiredRepay` from the passed-in vault; if more is provided, the excess is returned/refunded to the caller.
+  - Sends **exactly** `seizeAmount` collateral to the liquidator; never more.
+  - Enforce slippage guards: `maxRepayAmount ≥ requiredRepay` and `minSeizeAmount ≤ seizeAmount`, else revert.
+  - Multiple liquidations can occur over time, but each call performs a single exact-to-quote step. No “extra repay for extra seize.”
+
+### Insolvency redemption (borrower path)
+- **Repay-all-and-redeem:** The borrower must always be able to repay all outstanding debt and fully redeem their collateral in one operation, regardless of HF (including when HF < 1.0e24). This closes the position and returns all collateral to the borrower.
+- **Partial borrower repayments:** Borrowers can partially repay debt via normal repay flows; collateral withdrawals remain gated by the health check. The effective collateral-to-debt exchange rate is determined by risk parameters and prices, not by discretionary ratios.
+
+### Typical insolvency scenarios
+- **Missed/late liquidation:** Automation or keepers fail to liquidate promptly after HF dips below 1.0, allowing interest accrual or price drift to deepen undercollateralization.
+- **Sharp price gap:** A sudden oracle price drop (or market gap) pushes HF far below 1.0 faster than liquidation can be executed.
+- **Route guards:** DEX-vs-oracle deviation guard or slippage limits temporarily block the DEX route; HF may worsen until conditions normalize or a keeper route executes.
+
+### Partial-to-above-one policy
+- When `liquidationTargetHF` cannot be reached due to constraints, but HF ≥ 1.0 is reachable, liquidations should proceed to bring HF above 1.0 immediately rather than waiting to hit 1.05 later. Subsequent liquidations can finish the move to target as conditions allow.
+
+## Acceptance criteria
+- **Feasible cases:** After execution, `newHF` is ≥ `liquidationTargetHF - ε` (tiny tolerance for rounding) and ≈ target.
+- **Insolvent cases:** After execution, `newHF` is strictly improved compared to pre-liquidation HF. If the target is unreachable but solvency is, `newHF ≥ 1.0e24`. If even solvency is unreachable, `newHF < 1.0e24` but greater than pre-HF.
+- **No over-repay/over-seize:** Sending a larger vault must not increase `seizeAmount`; the contract only consumes `requiredRepay`.
+- **Slippage respected:** Transactions revert if `maxRepayAmount` < `requiredRepay` or `minSeizeAmount` > `seizeAmount`.
+
+## What needs to be fixed/verified
+- **Config**
+  - Verify `liquidationTargetHF` is 1.05e24 and exposed via `get_liquidation_params.cdc`.
+- **Contract**
+  - Ensure `quoteLiquidation`:
+    - Solves to target when feasible; otherwise returns boundary solution that maximizes HF under `seize ≤ availableCollateral`.
+    - Rounds conservatively (post-exec HF not below target when feasible).
+    - Respects monotonicity vs price.
+  - Ensure `liquidateRepayForSeize`:
+    - Consumes exactly `requiredRepay` and seizes exactly `seizeAmount`.
+    - Refunds any excess funds passed in.
+    - Enforces slippage guards and rejects partial repayments that do not meet the quoted requirement.
+- **Tests**
+  - Update insolvency test:
+    - Expect `requiredRepay > 0`, `seizeAmount > 0`.
+    - Do not require “full seize” by default; instead require `newHF` > pre-HF and not above target; if the scenario is known infeasible, allow `newHF < 1.0e24`.
+  - Update multi-liquidation test:
+    - Ensure initial price produces HF < 1.0.
+    - After one liquidation, assert `newHF` ≥ target (feasible case); if you want multi-step, drop price further and liquidate again.
+  - Add an “overpay attempt” test:
+    - Pass `maxRepayAmount` > `requiredRepay` and assert actual repay equals `requiredRepay` and `seizeAmount` unchanged.
+  - Add a slippage failure test:
+    - `maxRepayAmount < requiredRepay` → revert; `minSeizeAmount > seizeAmount` → revert.
+  - Add rounding guard test:
+    - Feasible case should not end below target due to rounding.
+