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
Triggering Liquidation: When a Trove's collateral ratio falls below 110%, a Liquidator triggers the liquidation
Debt Repayment: The Stability Pool covers the Trove's debt by burning the corresponding amount of USDFC
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
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:
Trove Liquidation: A Trove is liquidated, but the Stability Pool has insufficient USDFC
Debt and Collateral Redistribution: The debt and collateral are proportionally distributed to other active Troves
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.
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