🚰Liquidation

Understanding how under-collateralized positions are handled in the USDFC protocol

Overview

Liquidation is a critical mechanism in the USDFC Stablecoin Protocol that ensures the system remains solvent by handling under-collateralized positions. When a Trove's collateral ratio falls below 110%, it becomes eligible for liquidation, allowing the protocol to use the Stability Pool to cover the debt and distribute the collateral to depositors.

How It Works

Liquidations occur when a Trove's collateral ratio falls below the minimum threshold of 110%. The process involves using USDFC from the Stability Pool to repay the debt of the liquidated Trove, while distributing the Trove's collateral to Stability Pool depositors at a discount.

Liquidation Process

  1. Triggering Liquidation: When a Trove's collateral ratio falls below 110%, a Liquidator triggers the liquidation

  2. Debt Repayment: The Stability Pool covers the Trove's debt by burning the corresponding amount of USDFC

  3. Collateral Distribution: The collateral (FIL) from the liquidated Trove is distributed to the Stability Pool depositors based on their pool share, minus the Liquidator's compensation

The Stability Pool

The Stability Pool is a reserve of USDFC dedicated to absorbing liquidations when a borrower's collateral ratio falls below the required 110%. The pool serves several important functions:

  • Purpose: The Stability Pool repays the debt of liquidated borrowers using the deposited USDFC

  • Depositor Rewards: When USDFC from the pool is used, depositors receive Filecoin (FIL) from the liquidated collateral at a discount

  • System Stability: By providing a mechanism to handle under-collateralized positions, the Stability Pool helps maintain the overall stability of the protocol

Key Parameters

Parameter
Description
Default Value

Liquidation Threshold

Collateral ratio below which a Trove can be liquidated

110%

Liquidator Reward

Percentage of liquidated collateral given to the liquidator

0.5%

Liquidation Reserve

USDFC reserved for potential liquidation gas costs

20 USDFC

Stakeholders in the Liquidation Process

1. Stability Pool Depositors

  • Provide USDFC to the pool and receive FIL at a discount when liquidations occur

  • Effectively "buy FIL cheaper" than market price through the liquidation process

  • Earn passive rewards by helping maintain system stability

2. Liquidated Borrowers

  • Have their Trove liquidated when their collateral ratio falls below 110%

  • Lose a portion of their collateral to repay their debt

  • Trove will be closed, but they keep their borrowed USDFC

  • Typically incur around a 10% loss in the process

3. Liquidators

  • Trigger the liquidation process by calling the liquidation function

  • Receive the Liquidation Reserve (20 USDFC) as gas compensation

  • Earn 0.5% of the liquidated collateral as an incentive

Price Oracle

Secured Finance uses Pyth as the primary oracle to determine the FIL price. Pyth provides accurate and reliable real-time price feeds essential for system operations.

Fallback Mechanism

In case of extreme conditions where the Pyth price feed is unavailable, the protocol switches to Tellor as a backup:

  • Pyth price not updated for over 4 hours

  • Pyth response reverts, returns invalid data, or shows an invalid timestamp

  • Price change between consecutive updates exceeds 50%

This dual-oracle approach ensures that the protocol maintains accurate pricing and stability, even under extreme conditions.

What Happens If the Stability Pool Is Empty?

If the Stability Pool is empty during a liquidation, the protocol switches to a redistribution mechanism:

  1. Trove Liquidation: A Trove is liquidated, but the Stability Pool has insufficient USDFC

  2. Debt and Collateral Redistribution: The debt and collateral are proportionally distributed to other active Troves

  3. Impact on Troves: Troves receiving the redistributed collateral and debt may see their collateral ratio lower, while the net USD value increases

Common Questions

How can I avoid liquidation? Maintain a collateral ratio well above 110%. A buffer of 150% or higher is recommended to account for FIL price volatility.

What happens to my borrowed USDFC if my Trove is liquidated? You keep your borrowed USDFC, but lose your collateral. The liquidation effectively closes your Trove.

How can I benefit from liquidations? You can deposit USDFC into the Stability Pool to receive discounted FIL when liquidations occur, or become a liquidator to earn rewards for triggering liquidations.

Learn more in the FAQs section

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