Stability Pool
The stability pool acts as a strong mechanism to substantially support the protocol by providing incentives to pooled users
Last updated
The stability pool acts as a strong mechanism to substantially support the protocol by providing incentives to pooled users
Last updated
To avoid the protocol going into extreme stress, the stability pool acts as a source of liquidity to repay debt from liquidated loans to ensure that the total ARTH supply always remains backed by collateral.
When a loan position is liquidated, an equivalent amount of ARTH corresponding to the remaining debt has to be burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral (committed by the borrower) is transferred to the stability pool as rewards to stability providers.
Any user may deposit ARTH tokens to the Stability Pool. This allows them to earn the collateral from the liquidated Trove. When a liquidation occurs, the liquidated debt is canceled with the same amount of ARTH in the Pool (which is burned as a result), and the liquidated Ether is proportionally distributed to depositors.
Stability Pool depositors can expect to earn net gains from liquidations, as in most cases, the value of the liquidated Ether will be greater than the value of the canceled debt (since a liquidated loan will likely have an ICR just slightly below 110%).
The stability pool is currently deployed at
Stability Providers earn MAHA tokens continuously over time, in proportion to the size of their deposit. This is known as “Community Issuance”, and is handled by CommunityIssuance.sol.
Each Stability Pool deposit is tagged with a front end tag - the Ethereum address of the front end through which the deposit was made. Stability deposits made directly with the protocol (no front end) are tagged with the zero address.
When a deposit earns MAHA, it is split between the depositor and the front end through which the deposit was made. Upon registering as a front end, a front end chooses a “kickback rate”: this is the percentage of MAHA earned by a tagged deposit, to allocate to the depositor. Thus, the total MAHA received by a depositor is the total MAHA earned by their deposit, multiplied by kickbackRate.
The front end takes a cut of 1-kickbackRate of the MAHA earned by the deposit.
Here’s an example of the Stability Pool absorbing liquidations. The Stability Pool contains 3 depositors, A, B, and C, and the Growth peg:USD price is 100.
There are two loans to be liquidated, T1 and T2:
| Loans | Collateral (ETH) | Debt (ARTH) | ICR | ETH Value | Collateral Surplus |
|---|---|---|---|---|---|
Here are the deposits, before any liquidations occur:
Now, the first liquidation T1 is absorbed by the Pool: 150 debt is canceled with 150 Pool ARTH, and its 1.6 ETH is split between depositors. We see the gains earned by A, B, and C, are in proportion to their share of the total ARTH in the Stability Pool:
And now the second liquidation, T2, occurs: 225 debt is canceled with 225 Pool ARTH, and 2.45 ETH is split between depositors. The accumulated ETH gain includes all ETH gain from T1 and T2.
It’s clear that:
Each depositor gets the same ROI from a given liquidation
Depositors' return increases over time, as the deposits absorb liquidations with a positive collateral surplus
Eventually, a deposit can be fully “used up” in absorbing debt, and reduced to 0. This happens whenever a liquidation occurs that empties the Stability Pool. A deposit stops earning ETH gains when it has been reduced to 0.
The Stability Pool is funded by users who transfer their ARTH into the pool. These users are also known as pooled users or stability providers.
Here is an example transaction of a user depositing ARTH into the stability pool.
Users that provide ARTH to the stability pool, do so to earn liquidation rewards.
Over a certain period, the stability pool will lose some/part of their ARTH deposits, as the protocol uses the stability pool to repay bad debt from liquidated loans.
Although, during the same instance, the pool gains a share of the liquidated collateral (committed by the borrower at the time of procuring a loan).
As loan positions are always created at 110%+ CR and liquidated just below it, they are rationally accepted that the participants in the stability pool will always remain in a net positive position. The amount they receive from liquidated collateral will always remain more than the amount that was deducted to pay the liquidated position.
The only time that stability pool providers can be in a net negative position is when the collateral is losing value at a significant pace. In such a case, stability pool providers can immediately withdraw the collateral received from liquidations and sell their position if they feel that the collateral's value is decreasing significantly against the USD.
Stability Providers deposit ARTH into the stability pool, which acts as a supplement to the Loan platform. Depositing ARTH flatcoin to the Stability Pool earns you liquidation rewards.
Whenever a loan position is liquidated, the collateral used to fund the loan (at 110%), is returned to the Stability Pool. Stability Providers always remain in a safe and net positive position.
Liquidations happen below a 110% Collateralization Ratio. Let's take a situation where:
Current ARTH Pooled in the stability pool: $1,000,000 or 500,000 ARTH (assuming 1 $ARTH = 2 USD)
You deposit $100,000 or 50,000 ARTH
Thus, you have a 10% stake in the Stability Pool
A loan position of $200,000 gets liquidated at 109% collateral Ratio
Collateral liquidated = Loan taken out * CR% / Current Price of ETH ie, ($200,000 * 109%/3000) = 72.66 ETH
What do you pay:
Given that your pool share is 10%, your ARTH deposit will go down by 10% (the ARTH you added into the Stability Pool is used to settle the debt into the system) of the liquidated debt
Total Debt to be settled = 200,000 USD
Your Debt Share = 10%
Your Debt share = 20,000 USD (10% of Total Debt)
Your initial ARTH position: 100,000 USD
Your new ARTH position: 80,000 USD (Initial Position - Your Debt Share) .
What do you get:
In return, you will gain 10% of the liquidated collateral (72.66 ETH), i.e. 7.26 ETH, which is currently worth $21,780 (Current ETH price: $3000). Your net gain from the liquidation is $1,780 USD
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their ETH exposure, if the USD value of ETH is expected to decrease even further.
| Depositor | Deposit | Share |
|---|---|---|
| Deposit | Debt absorbed from T1 | Deposit after | Total ETH gained | Deposit + ETH gain | Current ROI |
|---|---|---|---|---|---|
| Depositor | Debt absorbed from T2 | Deposit after | Accumulated ETH | Deposit + ETH gain | Current ROI |
|---|---|---|---|---|---|
T1
1.6
150
1.066
160
10
T2
2.45
225
1.088
245
20
A
100
0.1667
B
200
0.3333
C
300
0.5
Total
600
1
A
25
75
0.2666
101.666
0.0166
B
50
150
0.53333
203.333
0.0166
C
75
225
0.8
305
0.0166
Total
150
450
1.6
610
0.0166
A
37.5
37.5
0.675
105
0.05
B
75
75
1.35
210
0.05
C
112.5
112.5
2.025
315
0.05
Total
225
225
4.05
630
0.05