Liquidations and Stability Pools
Introduction
Stability pools serve as a primary safeguard to ensure the solvency of the system. Their role is to provide the necessary liquidity to cover the debt from liquidated Troves, thereby guaranteeing that the total MEAD supply is always adequately collateralized.
Whenever a Trove is liquidated, an equivalent amount of MEAD (corresponding to the remaining debt of the Trove) is destroyed from the corresponding stability pool’s balance to settle its debt. As a result, the entirety of the Trove’s collateral is transferred to the corresponding stability pool.
The stability pools are financed by users (known as stability providers) depositing MEAD into it. Over time, these stability providers witness a proportional reduction in their MEAD deposits, but in return, they gain a proportional share of the liquidated collaterals.
Given that Troves are usually liquidated at slightly below their respective MCR, it is anticipated that stability providers will amass a larger USD value of collaterals relative to the debt they offset.
Benefits for Stability Providers
Collateral Distribution
Collateral Distribution
Stability providers get access to discounted collaterals (from all the supported collaterals in Roots) 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 Trove is liquidated.
Example:
Assume a total of 2,000,000 MEAD exists in the stability Pool, and you’ve deposited 200,000 MEAD.
Consider two scenarios:
-
A Trove with 200,000 MEAD debt and 300 WETH-WBERA collateral faces liquidation when the WETH-WBERA price is $666.
-
Another Trove with 100,000 MEAD debt and 200 WBERA-HONEY collateral is liquidated at a WBERA-HONEY price of $666.
With your 10% pool share, your deposit will decrease by 10% of the liquidated debt, amounting to 30,000 MEAD. This means your deposit will diminish from 200,000 to 170,000 MEAD.
In compensation, you’ll acquire 10% of the liquidated collateral:
- 30 WETH-WBERA
- 20 WBERA-HONEY
At the given price, this collateral is valued at 3,300 from the liquidation event.
Liquidations
In order to maintain full collateral backing for the entire MEAD supply, Troves that descend beneath their minimum collateral ratio are subject to liquidation.
The debt associated with the liquidated Trove is nullified and absorbed by the corresponding stability pool, and the collateral is redistributed amongst the stability providers.
Minimum Collateralization Ratios (MCR)
Different collateral types in the Roots protocol have specific Minimum Collateralization Ratios:
- WBERA, WETH, and WBTC: 150% MCR
- BYUSD-HONEY and USDCe-HONEY: 110% MCR
Borrowers must maintain their Trove’s collateral ratio above these thresholds to avoid liquidation. Check Recovery Mode for more information on how to avoid liquidation.
Liquidators
Anyone can initiate the liquidation of a Trove once its collateral ratio falls below the applicable Minimum Collateral Ratio (110% for stablecoin pairs, 150% for volatile assets). To incentivize this action, the liquidator is rewarded with a gas compensation.
Liquidating Troves involves certain gas costs that the liquidator must bear. To mitigate these costs, the protocol allows batch liquidations of multiple Troves, reducing the cost per Trove. However, to ensure liquidations remain profitable even when gas prices skyrocket, the protocol provides a gas compensation determined by the following formula:
Liquidations Rules and Scenarios
Key Terms:
- ICR = Individual Collateral Ratio
- MCR = Minimum Collateral Ratio
- GTCR = Global Total Collateral Ratio
- SP = Stability Pool
ICR ≤ 100%
ICR ≤ 100%
Redistribute all debt and collateral (minus collateral gas compensation) to active Troves.
100% < ICR < MCR
100% < ICR < MCR
The stability Pool MEAD is offset with an equal amount of debt from the Trove. A fraction of the Trove’s collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors.
Any remaining debt and collateral (minus collateral gas compensation) is redistributed to active Troves.
GTCR < 150% & MCR ≤ ICR < GTCR & SP MEAD ≥ Trove debt
GTCR < 150% & MCR ≤ ICR < GTCR & SP MEAD ≥ Trove debt
The protocol is in recovery mode. The stability Pool MEAD is offset with an equal amount of debt from the Trove. A fraction of collateral with dollar value equal to 1.2 * debt is shared between depositors.
Nothing is redistributed to other active Troves. Since its ICR was > 1.2, the Trove has a collateral remainder, which is claimable by the borrower. The Trove is closed.
Stability Pool With Insufficient Funds
When the stability pool lacks funds, an alternate liquidation process known as “redistribution” comes into play. In this scenario, the system reallocates the debt and collateral held within liquidated Trove to all other Troves currently in existence. This reallocation is performed based on the collateral value of each receiving Trove.