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Stability Pool and Liquidations - Real World Asset Token Staking
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 real world asset token supply always remains backed.
When any Trove is liquidated, an amount of real world asset tokens 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.
This event generally produces a net positive gain for stability pool stakers as the collateral is worth more (~110% of the real world asset tokens burned).
The Stability Pool is funded by users transferring real world asset tokens into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their real world asset token 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.
The debt of the Trove is canceled and absorbed by the Stability Pool and its collateral is distributed among Stability Providers.
The owner of the Trove still keeps the full amount of real world asset tokens borrowed but loses ~10% value overall, hence it is critical to always keep the ratio above 110%, ideally above 150%.
Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 real world asset tokens on Ethereum or 10 real world asset tokens on Binance Smart Chain + 0.5% of the Trove's collateral) as a reward for this service.
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 160 - 185 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 = 200real world asset tokens
on Ethereum or 10real world asset tokens
on Binance Smart Chain + 0.5% of Trove's collateral (BNB)
The 200 or 10 real world asset tokens are funded by a Liquidation Reserve while the variable 0.5% part (in BNB) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
Here is an example using USDL on BSC:
Let’s say there is a total of
1,000,000 USDLin the Stability Pool and your deposit is
Now, a Trove with a debt of
200,000 USDLand collateral of
400 BNBis liquidated at a BNB price of
$545, and thus at a collateral ratio of
109% (= 100% * (400 * 545) / 200,000).
Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (
20,000 USDL), i.e. from
80,000USDL. In return, you will gain 10% of the liquidated collateral, i.e.
40 BNB, which is currently worth
$21,800. Your net gain from the liquidation is
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to the native blockchain token, if its USD is expected to decrease (for an exception see Can I withdraw my deposit whenever I want?).
First, you need to open a Trove, borrow real world asset tokens, and deposit it to the Stability Pool. After making your deposit, you will start accumulating reward tokens proportional to the size of your deposit on a continuous basis.
Rewards will be the highest for early adopters of the system.
At any point in time, you can withdraw your pending rewards to your wallet address.
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.
The protocol uses Chainlink's ETH:USD price feed, falling back to the Tellor ETH:USD oracle under the following (extreme) conditions:
- Chainlink price has not been updated for more than 4 hours
- Chainlink response call reverts, returns an invalid price or an invalid timestamp
- The price change between two consecutive Chainlink price updates is >50%.
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 the real world asset tokens is trading significantly above the target peg, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since the real world asset tokens is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the real world asset tokens at a price above the target peg.
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.
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.
Here's an example: