The protocol utilizes a two-step liquidation mechanism in the following order of priority:
- 2.Redistribute under-collateralized loans to other borrowers if the Stability Pool is emptied
The protocol primarily uses the
ARTHtokens 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 (
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
ARTHbut the user loses approximately
10%in overall value for each liquidation + fees while repaying the borrowed loan.
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
If the liquidated debt is higher than the amount of
ARTHin 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.
- A borrower took out a loan of
$10,000by committing collateral in
ETHwith a CR of
- The borrower committed 4
ETHat a price of $3,000
- For the loan position to be eligible for liquidation, the CR% needs to go below
- If the price of
$2700), his current CR% will fall to
- Anybody can then liquidate this loan position
This transaction showcases a liquidation event that rewarded the liquidator with
50 ARTH + 0.5% of the collateraland sent the
ARTHstakers in the stability pool.
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.
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.
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.
Redistribute all debt and collateral (minus ETH gas compensation) to active loans.
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.
Redistribute all debt and collateral (minus
The total Stability Pool
The Stability Pool
A fraction of
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:
- Minimum Collateralization Ratio in Recovery mode:
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
Besides the gas fee compensation, the liquidator also earns
0.5%of the liquidated loan's collateral.
In the most extreme scenario when there is no
ARTHin 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