When a liquidator thinks that jFIATs are under-collateralized, they can trigger a liquidation by depositing the same amount of jFIATs they want to liquidate. From that point, either the liquidation will happen, or will be disputed.
If no-one disputes the liquidation, after a period called the "liveness period" and which varies according to the collateral, the liquidation is deemed correct and the jFIATs are liquidated.
The liquidator is rewarded with the entire collateral left of the said jFIATs.
But, during this liveness period, anyone cand dispute the liquidation if they think it is wrong.
To raise a dispute, the disputer needs to deposit a bond. The dispute will be settled by the DVM: UMA token holders should vote on the price of the jFIATs and of the collateral at the time of the liquidation, to statute whether the liquation was wrongly or rightly triggered.
$UMA holders are incentivized to vote correctly: a vote is deemed correct and rewarded with new $UMA token (inflation) if it is the winning vote.
If the liquidator was right, they will receive the bond deposited by the disputer in addition to the collateral of the jFIATs liquidated.
Otherwise, the disputer will receive part of the liquidator’s deposit, the other part will be sent to the jFIATs minter who was wrongly attacked.
This design lays on a perfect game theory as everyone is economically incentivized to well-behave:
liquidators will lose their deposit if they are wrong;
disputers will lose their bond if they wrongly dispute a liquidation;
voters will get diluted in they purposely or mistakenly vote for an incorrect price.
jFIATs collateralized with USDC have a liquidation threshold of 105%, under which a liquidation can be triggered.
jFIATs collateralized with USDC have a liveness period of 24 hours, after which an undisputed liquidation will come into force.