# Liquidation ## 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 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](/usdfc-stablecoin/faqs.md) ## Related Topics * [The Trove System](/usdfc-stablecoin/core-mechanics/the-trove-system.md) * [Collateral Ratio](https://github.com/Secured-Finance/secured-finance-docs/blob/main/usdfc-stablecoin/core-mechanics/liquidation/collateral-ratio.md) * [Liquidators](https://github.com/Secured-Finance/secured-finance-docs/blob/main/usdfc-stablecoin/core-mechanics/liquidation/liquidators.md) * [Liquidation Case Study](https://github.com/Secured-Finance/secured-finance-docs/blob/main/usdfc-stablecoin/core-mechanics/liquidation/case-study.md) * [Recovery Mode](/usdfc-stablecoin/advanced-topics/recovery-mode.md) --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. 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