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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.

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Benefits for Stability Providers

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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.

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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.

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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:

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Liquidations Rules and Scenarios

Key Terms:

  • ICR = Individual Collateral Ratio
  • MCR = Minimum Collateral Ratio
  • GTCR = Global Total Collateral Ratio
  • SP = Stability Pool

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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.