Liquidations

The protocol utilizes a two-step liquidation mechanism in the following order of priority:

  1. Offset under-collateralized loans against the Stability Pool containing ARTH tokens

  2. Redistribute under-collateralized loans to other borrowers if the Stability Pool is emptied

The protocol primarily uses the ARTH tokens in its Stability Pool to absorb the under-collateralized debt, i.e. to repay the liquidated borrower's liability.

Anybody can liquidate a loan as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (50 ARTH + 0.5% of the loan's collateral) as a reward for this service.

Post a liquidation, a loan position's debt is fulfilled by the stability pool and its collateral is distributed among stability pool providers. The borrower still keeps the loan amount he received in ARTH but the user loses approximately 10% in overall value for each liquidation + fees while repaying the borrowed loan.

Liquidations are performed by the TroveManager contract which is deployed at

0x8b1da95724b1e376aE49FdB67afE33Fe41093af5

In special cases when the total collateral ratio drops below 150% and the protocol goes under the Recovery mode, liquidation happens to all loans below the 150% collateral ratio until the total collateral ratio comes back to 150%

If the liquidated debt is higher than the amount of ARTH in the Stability Pool, the system tries to cancel as much debt as possible with the tokens in the Stability Pool, and then redistributes the remaining liquidated collateral and debt across all active loans.

Anyone may call the public liquidateTroves() function, which will check for under-collateralized loans, and liquidate them. Alternatively they can call batchLiquidateTroves() with a custom list of trove addresses to attempt to liquidate.

Liquidation example

  • A borrower took out a loan of $10,000 by committing collateral in ETH with a CR of 120%`

  • The borrower committed 4 ETH, taking ETH at a price of $3,000($10,000*120%/3000)

  • For the loan position to be eligible for liquidation, the CR% needs to go below 110%

  • If the price of ETH fell by 10% ($2700), his current CR% will fall to 108% ($2700*4 ETH = $10,800 or 108% Collateralization Ratio)

  • Anybody can then liquidate this loan position

This transaction showcases a liquidation event that rewarded the liquidator with 50 ARTH + 0.5% of the collateral and sent the ETH rewards to ARTH stakers in the stability pool.

Liquidation Logic

To understand what exactly happens in normal mode and in recovery mode, we detail below the precise behavior of liquidations, which depends on the ICR of the Trove being liquidated and global system conditions: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.

Normal Mode Liquidations (TCR > 150%)

Recovery Mode Liquidations (TCR < 150%)

In a special scenario when the protocol goes into Recovery Mode, liquidations handled by the protocol behave differently. This section describes all the various scenarios on when/how a liquidation happens.

FAQs

Who can liquidate a loan position?

Almost anybody can liquidate a loan position. The requirement to liquidate a loan position is simply:

Current Collateralization Ratio < Minimum Collateralization Ratio

  • Minimum Collateralization Ratio in Normal mode: 110%

  • Minimum Collateralization Ratio in Recovery mode: 150%

What do I get if I liquidate a loan position?

For every liquidation, the liquidator will have to pay gas fees. To make sure, liquidations are profitable, a significant gas fee is kept aside at the time of borrowing a loan.

Currently, the gas fee compensation is set at 50 ARTH.

Besides the gas fee compensation, the liquidator also earns 0.5% of the liquidated loan's collateral.

What happens if there is no ARTH in the stability pool?

In the most extreme scenario when there is no ARTH in the stability pool that can be used to pay back a loan, the debt & the collateral is redistributed across all the loan holders.

In such a case, the system redistributes the debt and collateral from liquidated loans to all other existing loans. The redistribution of debt and collateral is done in proportion to the recipient loan's collateral amount

Last updated