Stability Pool and Liquidations
Last updated
Last updated
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 borrowing Positions - ensuring that the total DCHF supply always remains backed.
When any Position is liquidated, an amount of DCHF corresponding to the remaining debt of the Position is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Position is transferred to the Stability Pool.
The Stability Pool is funded by users transferring DCHF into it (called Stability Providers). Over time, Stability Providers lose a pro rata share of their DCHF deposits, while gaining a pro rata share of the liquidated collateral. However, because Positions are likely to be liquidated at just below 110% collateral ratios, it is expected that Stability Providers will receive a greater value of collateral relative to the debt they pay off.
Stability Providers will make liquidation gains (see below) and receive early adopter rewards in form of MON tokens.
To ensure that the entire stablecoin supply remains fully backed by collateral, Positions that fall under the minimum collateral ratio of 110% will be closed (liquidated).
The debt of the Position is canceled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.
The owner of the Position still keeps the full amount of DCHF borrowed but loses ~10% value overall, hence it is critical to always keep the ratio above 110%, ideally above 150%.
Anybody can liquidate a Position as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 DCHF + 0.5% of the Position's collateral) as reward for this service.
The liquidation of Position is connected with certain gas costs which the initiator has to cover. The cost per Position was reduced by implementing batch liquidations of up to 160 - 185 Positions 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 = 200 DCHF + 0.5% of Position's collateral (ETH)
The 200 DCHF is funded by a Liquidation Reserve while the variable 0.5% part (in ETH) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Position is liquidated.
Let’s say there is a total of 1,000,000 DCHF in the Stability Pool and your deposit is 100,000 DCHF.
Now, a Position with debt of 200,000 DCHF and collateral of 400 ETH is liquidated at an Ether 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 DCHF), i.e. from 100,000 to 80,000 DCHF. In return, you will gain 10% of the liquidated collateral, i.e. 40 ETH, which is currently worth $21,800. Your net gain from the liquidation is $1,800.
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to ETH, if the USD value of ETH is expected to decrease (for an exception see Can I withdraw my deposit whenever I want?).
First you need to open a Position, borrow DCHF, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in MON) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule. Rewards will be the highest for early adopters of the system.
At any point in time, you can withdraw your pending rewards to your Ethereum 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 Positions with a collateral ratio below 110% that have not been liquidated yet.
While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Position 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 DCHF is trading above CHF 1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since DCHF is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the DCHF at a price above CHF 1.
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 Positions to all other existing Positions. The redistribution of debt and collateral is done in proportion to the recipient Position's collateral amount.
