Default & liquidation

This page is the unhappy path: what happens when a MLKY 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.

Three things are worth knowing before the detail, because they are the ones most people get wrong:

Defaulting is not the only alternative to repaying. While the loan is still active — including all through the grace period — you can extend instead: settle the interest, pay down at least 10% of the principal, and start a fresh term. Three times at most, and only if the card is still appraised high enough to support the reduced loan.
You can still repay after you default. The right to buy your card back lasts until the card actually sells, not until the auction opens.
Money above what you owe comes back to you. The card is sold, we take a 5% commission, your lender is paid what they are owed, and the rest is yours.

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, you can repay on the original terms and nothing has happened.

The grace period is your loan's term, or 7 days, whichever is shorter. A 30-day loan gets the full 7 days. A 3-day loan gets 3. It is set per term option at the pool level (see terms and fees for the bounds).

Eligibility doesn't mean the loan is automatically sold. It means the loan may now be flipped into the sale state, and anyone can do it — loan_mark_default_and_start_auction is permissionless. It used to require the protocol admin, and what their signature buys now is narrower: the right to choose the sale's terms rather than take the protocol's default 24-hour descending-price window. A wallet that is early is refused with LoanNotMatured, which is the only check there was ever anything to check.

In practice the wallet that sends it will be your lender or a keeper watching for the deadline, and you should assume it happens promptly rather than whenever an operator gets to it.

Your lender cannot take the card. There is no path in the protocol by which the person who funded your loan ends up holding your card instead of being repaid in cash. MLKY runs the sale; the lender's claim is the money they are owed and nothing more.

You will be told before anything is sold

Before the card is offered for sale you get an authenticated notice through the app, telling you the loan is past grace and what you would need to pay to stop the sale. After the card sells, you get a second notice within 10 days telling you what it sold for and how much is waiting for you.

Neither notice is a courtesy that can be skipped, and neither is something you have to opt into.

What happens at default

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

The loan moves to Defaulted
Outstanding principal stays on the books. The card stays locked in the protocol's collateral vault. You can still repay — see below.
A descending-price sale opens
The protocol initializes an Auction account. The price starts at what the oracle said your card was worth when you borrowed, and falls to your principal over 24 hours. The first buyer to accept the current price takes the card.
A bid escrow vault is opened
The sale has its own USDC escrow. The buyer's funds flow into this escrow, and are paid out at settlement.

Starting a sale costs a small amount of rent to fund the new accounts. That rent is refunded to whoever later settles the sale or cancels it for no bids — both of those instructions are permissionless and close the accounts to their own caller. So the keeper incentive sits on finishing a sale, not on starting one.

You can repay right up until the card sells

This is the most important mechanic on this page.

A defaulted loan is still repayable. The instruction is loan_redeem_from_auction, it takes a loan in the Defaulted state, and only you can send it — buying your own card back is your exit, not something a stranger can do on your behalf. When it lands:

Any bidder standing on the sale is refunded, as a credit they claim themselves rather than a transfer that could fail.
The sale is closed.
Your card comes back to you by the ordinary repaid-and-closed path.

The amount is the same payoff you always owed: principal plus the fixed interest. There is no default penalty and no repurchase premium.

It is all or nothing. You have to cover the whole payoff. Offer more and the protocol takes exactly what you owe and no more; offer less and the transaction is refused rather than treated as a part payment. The reason is worth knowing, because a friendlier-sounding rule would trap you: a partial redemption would leave your loan still in default with its sale already closed, and that is a position with no way out — no sale left to repay the pool, and no path left for you to finish paying.

The window closes when the sale settles — that is, when a buyer's payment and the card actually change hands. Not when the loan is marked defaulted, and not when the sale opens.

The sale itself

Every default sale is a descending-price (Dutch) auction:

The price opens at the card's appraised value — the fair market value the oracle signed when you took the loan, carried on the loan account as oracle_snapshot.
It falls linearly to your principal over the sale window, which is 24 hours by default.
The first buyer to accept the current price wins the card. There is no escalation and no second round.
Bid and settlement are typically bundled into one transaction, so the card transfers to the buyer immediately after the bid is accepted.

If your card's appraised value has fallen below your principal, the sale opens flat at the principal.

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

Where the money goes

When a sale settles, the protocol applies a fixed order to the proceeds:

A 5% sale commission comes off the top
Charged on the gross sale price, on every sale — including one that does not cover the debt. It is 0% if MLKY or an affiliate is the buyer.
Your lender's principal
The capital they put up.
Your lender's interest, then fees
Principal is paid before interest deliberately. Interest is the thing at risk in a default; capital is not.
Everything left is yours
Not a share of it, not a portion of it above some threshold — the remainder.

The three amounts always sum to exactly the sale price. No rounding leaks value in any direction.

A worked example

Your card was appraised at $2,000 and you borrowed $1,000 for 30 days at a fixed interest of $24.66. You don't repay, the grace window passes, and the card sells at $1,600.


Sale price	$1,600.00
Sale commission (5% of gross)	−$80.00
Lender: principal	−$1,000.00
Lender: interest	−$24.66
Yours	$495.34

If the same card had sold for $900 — less than you owed:


Sale price	$900.00
Sale commission (5% of gross)	−$45.00
Lender: principal, then interest	−$855.00
Yours	$0.00

Your debt is discharged in both cases. The lender absorbs the $169.66 shortfall in the second one; the protocol does not pursue you for it.

How you get paid

Your residual is written to the chain as a credit in your name, not pushed to your wallet. Settlement is permissionless — anybody can finish a sale — and a push transfer to a missing or frozen token account would let one broken account block every settlement in the protocol. So the money is recorded against you and you collect it with a single transaction whenever you like.

Two consequences worth knowing:

Claiming is on you. Nothing arrives automatically. The app will show the credit and the button; the notice you receive after the sale tells you it is there.
There is a deadline, and it is twelve months. After that the protocol may take an unclaimed residual for itself, through an admin instruction called sweep_expired_borrower_credit. No interest accrues on the money in the meantime, in either direction.

Worth being precise about what the deadline is, because it is not quite a cut-off: your own claim never expires in the code, and a residual stays collectable by you even after the twelve months. What the deadline does is give the protocol a competing right to sweep it. Once both are open, whichever transaction lands first wins — so treat twelve months as the point after which the money is no longer reliably yours, and claim well before then.

For the precise settlement logic, see settlement and waterfall.

What if no one buys?

If the sale expires with no buyer, the card moves into protocol custody and the loan closes. Your claim on the card ends at that point, and there is no residual yet, because there have been no proceeds yet.

The card does not go to your lender — they take the write-off against their pool instead. MLKY can then sell it off-platform, and if it does, your claim on the money survives: the proceeds repay the pool up to what your loan owed, and anything above that is credited to you, claimable for twelve months exactly as an auction surplus is.

Three things to be clear about, because the difference between them matters to you.

Nothing obliges that sale and no deadline sets when it must happen. There is no clock, no expiry and no instruction that forces the card out of custody. A card can sit there indefinitely. Until it sells there are no proceeds, so your equity in the card is unrealised rather than pending — there is no residual waiting for you to collect, because nothing has been sold. This is a deliberate decision and not something waiting to be fixed: MLKY declined both an on-chain deadline and a published timeline, and handles these cards case by case. Treat a card in protocol custody as gone, and a later residual as a possibility rather than an entitlement.

The sale price is MLKY's to report and nothing on the blockchain can check it against the real sale, though the price, the buyer and the commission are all published on chain when it happens.

Nothing tells you if it happens. The twelve months run from the sale rather than from your default, so a long wait does not shorten your claim window — but no notice is sent at any point, so the window opens without you being told. If your card went into protocol custody, checking for a residual is on you.

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

What you can do as a borrower

Repay before maturity. Still the cheapest thing you can do by a wide margin. The residual mechanism returns your equity, but you lose the card, the 5% commission, and the difference between a forced 24-hour sale and a sale you run yourself.
Extend, if you can't repay and the loan is still active. Settling the interest and paying down at least 10% of the principal buys you a fresh term, and it is available right through the grace period — which is where most people who need it are standing. It is not a way out of a default: once the loan is Defaulted extending is closed and redemption takes its place. And it is not guaranteed, because the card is re-appraised and the renewal is refused if it has fallen too far. See extending a loan.
Watch the grace clock. Remember it is min(term, 7 days), so a short loan has a short buffer. It is also the last of the window in which you can extend.
Redeem if the numbers work. If your card is worth meaningfully more than the payoff, repaying during the sale is better than letting it clear — you keep the card instead of the cash, and you pay no commission.
You may bid on your own card, and nothing forbids it, but redeeming is cheaper than buying: redemption costs the payoff, a winning bid costs the clearing price plus the commission that comes off it.