Liquidations
The protocol utilizes a two-step liquidation mechanism in the following order of priority:
Offset under-collateralized loans against the Stability Pool containing
ARTHtokensRedistribute 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
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
$10,000by committing collateral inETHwith a CR of120%`The borrower committed 4
ETH, takingETHat 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
ETHfell by10%($2700), his current CR% will fall to108%($2700*4 ETH=$10,800or108%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.
MCR = Minimum Collateral Ratio
TCR = Total Collateral Ratio
Normal Mode Liquidations (TCR > 150%)
ICR < MCR and
Stability Pool ARTH >= loan debt
ARTH in the StabilityPool equal to the Trove's debt is offset with the Trove's debt.
The Trove's ETH collateral is shared between depositors.
ICR < MCR and
Stability Pool ARTH < loan debt
The total StabilityPool ARTH is offset with an equal amount of debt from the loan. A fraction of the loan's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors.
The remaining debt and collateral (minus ETH gas compensation) is redistributed to active loans.
ICR < MCR and
Stability Pool ARTH = 0
Redistribute all debt and collateral (minus ETH gas compensation) to active loans.
ICR >= MCR
Do nothing.
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.
ICR <=100%
Redistribute all debt and collateral (minus ETH gas compensation) to active loans.
100% < ICR < MCR and
Stability Pool ARTH > Loan debt
ARTH in the Stability Pool equal to the loan's debt is offset with the loan's debt. The loan's ETH collateral (minus ETH gas compensation) is shared between depositors.
100% < ICR < MCR and
Stability Pool ARTH < Loan debt
The total Stability Pool ARTH is offset with an equal amount of debt from the loan. A fraction of the loan's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors.
The remaining debt and collateral (minus ETH gas compensation) is redistributed to all remaining active loans.
MCR <= ICR < 150% and
Stability Pool ARTH >= Loan debt
The Stability Pool ARTH is offset with an equal amount of debt from the Trove.
A fraction of ETH collateral with dollar value equal to 1.1 * debt is shared between depositors. Nothing is redistributed to other active loans.
Since its ICR was > 1.1, the Trove has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The loan is closed.
MCR <= ICR < 150% and Stability Pool ARTH < Trove debt
Nothing Happens
ICR >= 150%
Nothing 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
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