⚡Instant Liquidation and Stability Pool
Last updated
Last updated
To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio will be closed (aka. liquidated).
The debt of the Vault is canceled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.
The owner of the Vault still keeps the full amount of GAI borrowed but loses ~(minimum collateral ratio - 100%) value overall hence it is critical to always keep the ratio above the minimum collateral ratio, ideally above 30% or 40% + minimum collateral ratio.
The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Vaults—ensuring that the total GAI supply always remains backed.
When any Vault is liquidated, an amount of GAI corresponding to the remaining debt of the Vault is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Vault is transferred to the Stability Pool.
The Stability Pool is funded by users transferring GAI into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their GAI deposits, while gaining a pro-rata share of the liquidated collateral. However, because Vaults are likely to be liquidated at just below the minimum collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off, so they can decide to immediately cash out and take the profit.
Stability Providers will make liquidation gains (i.e. earn collaterals at a favorable price usually below the market price) and receive early adopter rewards in form of GOK tokens.
Anybody can liquidate a Vault as soon as it drops below the Minimum Collateral Ratio of the collateral type. The initiator receives a gas compensation (10 GAI + 0.5% of the Vault's collateral) as reward for this service. See more details in liquidation compensation section.
The liquidation of Vaults is connected with certain gas costs which the initiator has to cover. The cost per Vault was reduced by implementing batch liquidations of up to 160 - 185 Vaults but with the aim of ensuring that liquidations remain profitable even in times of soaring gas prices the protocol offers a gas compensation given by the following formula:
gas compensation = 10 GAI + 0.5% of Vault's collateral
The 10 GAI is funded by a Liquidation Reserve while the variable 0.5% part comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
As liquidations happen just below the minimum collateral ratio for an asset, you will most likely experience a net gain whenever a Vault is liquidated.
Let’s say there is a total of 1,000,000 GAI in the Stability Pool and your deposit is 100,000 GAI.
Now, a Vault with debt of 200,000 GAI and collateral of 400 ETH is liquidated at an Ether price of $545, and thus at a collateral ratio of 109% (= 100% * (400 * 545) / 200,000). Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 GAI), i.e. from 100,000 to 80,000 GAI. In return, you will gain 10% of the liquidated collateral, i.e. 40 ETH, which is currently worth $21,800. Your net gain from the liquidation is $1,800.
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to ETH, if the USD value of ETH is expected to decrease.
First you need to open a Vault, borrow GAI, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in GOK) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule. Rewards will be the highest for early adopters of the system.
At any point in time, you can withdraw your pending rewards to your wallet.
As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration. However, withdrawals are temporarily suspended whenever there are liquidatable Vaults with a collateral ratio below 110% that have not been liquidated yet.
The protocol currently uses the latest cutting edge Pyth price feeds.
While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Vault gets liquidated below 100% in a flash crash or due to an oracle failure. In such a case, you may experience a loss since the collateral gain will be smaller than the reduction of your deposit.
If GAI is trading above $1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since GAI is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the GAI at a price above $1.
Please note that although the system is diligently audited, a hack or a bug that results in losses for the users can never be fully excluded.
If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Vaults to all other existing Vaults. The redistribution of debt and collateral is done in proportion to the recipient Vault's collateral amount
