Comment on page
Stability Pool and Liquidations
The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Troves—ensuring that the total USDE supply always remains backed.When any Trove is liquidated, an amount of USDE corresponding to the remaining debt of the Trove is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Trove is transferred to the Stability Pool.The Stability Pool is funded by users transferring USDE into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their USDE deposits, while gaining a pro-rata share of the liquidated collateral. However, because Troves are likely to be liquidated at just below
110%collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.
- Let’s say there is a total of
1,000,000 USDEin the Stability Pool and your deposit is
- Now, a Trove with debt of
200,000 USDEand collateral of
400 ETHis liquidated at an ETH price of
$545, and thus at a collateral ratio of
- Given that your pool share is
10%, your deposit will go down by
10%of the liquidated debt (
20,000 USDE), i.e. from
- In return, you will gain
10%of the liquidated collateral, i.e.
40 ETH. Your net gain from the liquidation is
Of course, this is just a simple example. Since the user's collateral is composed of multiple collateral, the actual calculation process may be more complicated, but I believe you have understood. Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to collateral, if the USD value of collateral is expected to decrease (for an exception see Can I withdraw my deposit whenever I want?).
As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration. However, withdrawals are temporarily suspended whenever there are liquidatable Troves with a collateral ratio below
110%that have not been liquidated yet.
While liquidations will occur at a collateral ratio well above
100%most of the time, it is theoretically possible that a Trove gets liquidated below
100%in a flash crash or due to an oracle failure. In such a case, you may experience a loss since the collateral gain will be smaller than the reduction of your deposit.If USDE is trading above
$1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than
100%. However, this loss is hypothetical since USDE is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the USDE at a price above
$1.Please note that although the system is diligently audited, a hack or a bug that results in losses for the users can never be fully excluded.
If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Troves to all other existing Troves. The redistribution of debt and collateral is done in proportion to the recipient Trove's collateral amount.
To ensure that the entire stablecoin supply remains fully backed by collateral, Troves that fall under the minimum collateral ratio of
110%will be closed (liquidated).The debt of the Trove is canceled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.The owner of the Trove still keeps the full amount of USDE borrowed but loses
~10%value overall hence it is critical to always keep the ratio above
110%, ideally above
Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of
110%. The initiator receives a gas compensation (
0.5%of the Trove's collateral) as reward for this service.
The liquidation of Troves is connected with certain gas costs which the initiator has to cover. The cost per Trove was reduced by implementing batch liquidations of up to 80 - 105 Troves but with the aim of ensuring that liquidations remain profitable even in times of soaring gas prices the protocol offers a gas compensation given by the following formula:
gas compensation = 200 USDE + 0.5% of Trove's collateralThe
200 USDEis funded by a Liquidation Reserve while the variable
0.5%part comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
You lose your collateral as your debt is paid off through liquidation, i.e. you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of
9.09% (= 100% * 10 / 110)of your collateral’s Dollar value.
When you open a Trove and draw a loan,
200 USDEis set aside as a way to compensate gas costs for the transaction sender in the event your Trove being liquidated. The Liquidation Reserve is fully refundable if your Trove is not liquidated, and is given back to you when you close your Trove by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a Trove's collateral ratio, slightly increasing the actual collateral requirements.