Stability Pool and Liquidations

What is the Stability Pool?

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.

Why should I deposit USDE to the Stability Pool?

Stability Providers will make liquidation gains (see below).

How do I benefit as a Stability Provider from liquidations?

As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Trove is liquidated.

  • Let’s say there is a total of 1,000,000 USDE in the Stability Pool and your deposit is 100,000 USDE.

  • Now, a Trove with debt of 200,000 USDE and collateral of 400 ETH is liquidated at an ETH price of $545, and thus at a collateral ratio of 109%.

  • Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDE), i.e. from 100,000 to 80,000 USDE.

  • In return, you will gain 10% of the liquidated collateral, i.e. 40 ETH. Your net gain from the liquidation is $1,800(40*545-20000).

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?).

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.

Can I lose money by depositing funds to the Stability Pool?

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.

What happens if the Stability Pool is empty when liquidations occur?

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.

What are liquidations?

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 130%.

Who can liquidate Troves?

Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 USDE + 0.5% of the Trove's collateral) as reward for this service.

How am I compensated for liquidating a Trove?

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 USDE is funded by a Liquidation Reserve while the variable 0.5% part comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.

What happens if my Trove is liquidated?

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.

What is the Liquidation Reserve?

When you open a Trove and draw a loan, 200 USDE is 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.

Last updated