Acquiring Liquidated Collateral at a Discount
When a vault's collateral ratio falls below the MCR, its debt will be liquidated. As long as the vault is overcollateralized above 100%, stability providers will effectively be able to acquire the collateral at a discount.
When a vault is liquidated. the amount of collateral acquired by the liquidator and Stability Pool has an upper limit of 110% of debt value. The additional 10% serves as a Liquidation Penalty.
Any remaining collateral will be returned to the vault originator. This is done to provide sufficient incentive for users to open new vaults even with a higher liquidation threshold in place to safeguard the protocol.
Do note that 99.5% and 0.5% of liquidated collateral will go to the Stability Pool and liquidator respectively. The liquidator will also be compensated with the liquidation reserve to cover gas fees.
Example:
The stability pool has 500,000 cUSD. Amy deposits 50,000 cUSD into the stability pool. Amy now owns 10% of the pool.
Bob has a vault with a 100,000 cUSD debt position, and 12,000 xFIL in collateral.
The price of xFIL falls to $10.
MCR = 130%
At xFIL=$10, Bob's ICR is:
$10 x 12,000 / 100,000 * 100% = 120%
As Bob's ICR of 120% has fallen below the 130% MCR, his vault gets liquidated. Since his debt is 100,000 cUSD, the value of liquidated collateral is:
110% * 100,000 = 110,000 cUSD, equivalent to 11,000 xFIL
Of this 11,000 xFIL, 10,000 xFIL (equivalent to 100,000 cUSD) covers the amount of Bob's original debt. The remaining 1,000 xFIL is the Liquidation Penalty.
1,000 xFIL remains in the vault (12,000 xFIL - 11,000 xFIL). This is returned to Bob.
Consequently, the amount of cUSD in the Stability Pool decreases by 100,000 cUSD to clear Bob's debt. Bob's liquidated collateral of 11,000 xFIL is transferred to the Stability Pool and the liquidator.
Stability Pool receives: 99.5% * 11,000 xFIL = 10,945 xFIL
Liquidator receives: 0.5% * 11,000 xFIL = 55 xFIL
The Stability Pool now has 400,000 cUSD and 10,945 xFIL.
As Amy has a 10% share of the stability pool, she ends up with 40,000 cUSD and 1,094.5 xFIL after the liquidation of Bob's vault.
Assuming the price of xFIL remains at $10, the value of Amy’s total portfolio will have increased from $50,000 to $50,945, earning her $945 in profit.
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