Liquidations

Stability Pool

The stability pool serves as a primary safeguard to ensure the solvency of the system. Its role is to provide the necessary liquidity to cover the debt from liquidated vaults, thereby guaranteeing that the total fixUSD supply is always adequately collateralized.

Whenever a CDP is liquidated, an equivalent amount of fixUSD (corresponding to the remaining debt of the vault) is destroyed from the stability pool's balance to settle its debt. As a result, the entirety of the vault's collateral is transferred to the stability pool.

The stability pool is financed by users (known as stability providers) depositing fixUSD into it. Over time, these stability providers witness a proportional reduction in their fixUSD deposits, but in return, they gain a proportional share of the liquidated collaterals.

Given that vaults are usually liquidated at slightly below 120% collateral ratios, it is anticipated that stability providers will amass a larger usd value of collaterals relative to the debt they offset.

Benefits for Stability Providers

Stability providers benefit from financing the stability pool in several ways.

Collateral distribution

To start with, stability providers get access to discounted collaterals (from all the supported collaterals in NoFrame) from liquidations without the need to spend gas or run liquidation bots.

As liquidations happen just below the MCR, which is greater than 100%, stability providers receive a discount of MCR - 100% on the liquidated collateral, thus experiencing a net gain when a vault is liquidated.

NoFrame Token Emissions

Furthermore, the stability pool is natively integrated into the emission system and therefore they accrue emissions while providing liquidity.

Stability providers can coordinate and vote to maximize the share of emission directed toward stability pool deposits

Liquidations

In order to maintain full collateral backing for the entire fixUSD supply, CDPs that descend beneath the minimum collateral ratio of 120% are subject to liquidation.

The debt associated with the liquidated vault is nullified and absorbed by the stability pool, and the collateral is redistributed amongst the stability providers.

Despite the liquidation, the vault owner retains the full amount of mkUSD borrowed but suffers an overall loss up to 20% in value. Consequently, it is crucial for borrowers to maintain their collateral ratio above the minimum threshold of 120%.

Liquidators

Anyone can initiate the liquidation of an vault once its collateral ratio falls below the Minimum Collateral Ratio of 120%. To incentivize this action, the liquidator is rewarded with a gas compensation.

Liquidating vaults involves certain gas costs that the liquidator must bear. To mitigate these costs, the protocol allows batch liquidations of multiple vaults, reducing the cost per vault. However, to ensure liquidations remain profitable even when gas prices skyrocket, the protocol provides a gas compensation determined by the following formula:

Gas Compensation = 200 fixUSD + 0.5% of CDP Collateral

The 200 fixUSD is sourced from the Liquidation Reserve, while the variable 0.5% portion is taken from the liquidated collateral. This slightly diminishes the liquidation gain for stability providers.