Default & liquidation

This page is the unhappy path: what happens when a Milky loan is not repaid on time. The mechanics are designed to be predictable, time-based, and non-discretionary — there is no human or admin choice to "call" a loan early, and no discretion in who gets paid.

When does a loan default?

A loan becomes eligible for default when the current Solana cluster time is strictly greater than:

maturity_ts + grace_period_secs

Until that point, the borrower can repay on the original terms. The grace period is set per term option at the pool level, and is typically 7 days (see terms and fees for the bounds).

Eligibility doesn't mean the loan is automatically liquidated. It means that the next person to submit a loan_mark_default_and_start_auction transaction will succeed — that is, the loan can be flipped into the auction state by anyone, not just the lender or the protocol.

What happens at default

The default-and-start-auction instruction does several things in one transaction:

The loan moves to Defaulted
Outstanding principal stays on the books, but the borrower no longer has the option to repay on the original terms. The card stays locked in the protocol's collateral vault.
An auction account is created
The protocol initializes a new Auction account, sets the reserve price equal to the full payoff (principal + fixed_interest_due), and starts the bidding window.
A bid escrow vault is opened
The auction has its own USDC escrow. Bidders' funds flow into this escrow during the auction, and are paid out at settlement.

The starter pays a small amount of rent to fund the new accounts; that rent is reimbursed at settlement (or at no-bid cancel) so keepers have an incentive to start auctions promptly.

The auction itself

In production today, every default auction is a Dutch auction:

The price is listed at roughly 2× the reserve when the auction opens.
It decreases linearly down to the reserve over the auction duration (about 5 minutes by default for the production keeper).
The first bidder to accept the current price wins the card. There is no escalation or second round.
Bid and settlement are typically bundled into one transaction, so the card transfers to the winner immediately after the bid is accepted.

The full mechanics, including the alternate English-auction path that exists in the on-chain program but is not used in the production default flow, are in the auctions section.

How the proceeds are split

When an auction settles, the protocol applies a fixed waterfall to the winning bid:

Debt first. The pool gets the principal + fixed interest owed on the defaulted loan. If the winning bid is less than the debt (rare, but possible if reserve has been hit and discounts apply), the pool absorbs the shortfall.
Surplus split. Any amount above the debt is split between the protocol fee account and the pool. The protocol's share of the surplus is configurable; the rest accrues to the pool's NAV (and therefore to lender PPS).
Borrower gets nothing. Once a loan defaults, the borrower has no claim on auction proceeds. Surplus does not return to them.

This is the most important rule for borrowers to internalize: defaulting is a total loss of the card's upside. Repaying — even one day before default would otherwise trigger — preserves all the card's value.

For the precise waterfall logic, see settlement and waterfall.

What if no one bids?

If the auction expires with zero bids, the card is moved into pool-held custody. The loan account, locks, and auction account are all closed and their rent is refunded. The pool admin can then withdraw the card from the pool's NFT account (often to re-list it via a different channel). The borrower's claim on the card is, again, gone — the asset has been transferred away from the borrower's wallet.

See no-bid outcome for the operational details of this branch.

What you can do as a borrower

Practical advice if you're worried about default:

Repay before maturity. The cheapest thing you can possibly do is pay the full payoff before the maturity timestamp. There is no early-repayment benefit in the math, but waiting until the very end gives you no margin for transaction errors.
Watch the grace clock. If you're going to be late, the grace period is your buffer — but it is not infinite. Pools typically grant 7 days.
Don't expect to "buy back" your own card from the auction. Nothing in the protocol forbids you from bidding, but the auction starts at roughly twice the payoff, and the protocol takes a sizeable cut of any surplus. Buying back your own card is more expensive than just repaying.