How do liquidations work?

If a borrower misses their rewards payment, they have a five day grace period to make the payment. Borrowers must arrange payment with the pool delegate during this time, or to inform them of the reason for any temporary cashflow issue. If the borrower does not make the payment within the grace period, their collateral can be liquidated by the pool delegate via an AMM (ALEX) liquidation and repaid to the lending pools that funded the loan.
Institutions who default will incur serious reputational damage which would impair their ability to continue operating in the sector as a record of the default will exist on-chain.
Borrowers enter a Master Loan Agreement (MLA) during onboarding which enables legal enforcement. The Master Loan Agreement sets out the terms and conditions on which the Borrower can obtain Bitcoin loans from the lending pools, and the legal ramifications in the case of a default.