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Defaults are not liquidations, they are a choice made by the borrower
- 2.The borrower chooses to default. The borrowers collateral value may be below the value of the loan by the repayment due date (you can do this to hedge). It makes logical sense to not pay back the loan.
Please note, a borrower can repay pay a loan partially, they would then receive a partial amount of their collateral.
A protocol could lend out stablecoins for ETH if they want more exposure to ETH. By using Vendor Protocol they are setting a limit order to buy ETH from the borrowers at a predetermined price set by the lend ratio