Instant Liquidation and Stability Pool

What is liquidation?

To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio (e.g. 130% for ASTR) 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 BAI 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.

What is the Stability Pool?

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 BAI supply always remains backed.

When any Vault is liquidated, an amount of BAI 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 BAI into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their BAI 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.

Why should I deposit BAI to the Stability Pool?

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 ATID tokens.

Who can liquidate Vaults?

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 BAI + 0.5% of the Vault's collateral) as reward for this service. See more details in liquidation compensation.

How am I compensated for liquidating a Vault?

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 BAI + 0.5% of Vault's collateral

The 10 BAI 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.

How do I benefit as a Stability Provider from liquidations?

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 BAI in the Stability Pool and your deposit is 100,000 BAI.

Now, a Vault with debt of 200,000 BAI 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 BAI), i.e. from 100,000 to 80,000 BAI. 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 (for an exception see Can I withdraw my deposit whenever I want?).

How do I benefit as a Stability Provider from early adopter rewards?

First you need to open a Vault, borrow BAI, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in ATID) 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.

Can I withdraw my deposit whenever I want?

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.

What oracle are you using to determine the price of the collaterals?

The protocol currently uses DIA price feeds, and will expand to other oracle services when ready.

Can I lose money by depositing funds to the Stability Pool?

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 BAI is trading above $1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since BAI is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the BAI 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.

What happens if the Stability Pool is empty when liquidations occur?

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.