Stability Pool and Liquidations

Stability pool

The Stability Pool acts as the primary safeguard in upholding system solvency. Its role is to act as the liquidity source for repaying debt from liquidated Chests, ensuring a consistent backing for the total USDs supply.

When a Chest gets liquidated, an amount of USDs equivalent to the remaining debt is burned from the Stability Pool, settling the debt. In return, the entire collateral from the liquidated Chest is transferred to the Stability Pool.

Stability Providers, who contribute USDs to the pool, fund the Stability Pool. Over time, Stability Providers experience a pro-rata reduction in their USDs deposits but gain a pro-rata share of the liquidated collateral. Given that Chests are likely to be liquidated just below the minimum collateral ratio, it is anticipated that Stability Providers will receive a greater dollar-value of collateral relative to the debt they settle.

Stability pool depositors

Users who deposit USDs in the stability pool benefit from Chest liquidations and earn additional STS incentives. As liquididations happen just below the minimum collateral ratio threshold, they will most likely experience a net gain of +25% in collateral assets on their stability pool deposits whenever a Chest is liquidated.

Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to that collateral asset, if the USD value of that asset is expected to decrease.

As a stability provider you will also start accumulating STS rewards proportional to the size of your deposit in the pool on a continuous basis. The reward is calculated according to the rewards schedule and pending rewards can be claimed at any time.

Stability pool withdrawals

In general, you have the flexibility to withdraw your deposit from the Stability Pool at any time, without any minimum lockup duration. However, withdrawals are temporarily halted when there are Chests eligible for liquidation, possessing a collateral ratio below the threshold, that haven't been liquidated yet.

Liquidations

To maintain full collateral backing for the entire USDs supply, Chests exceeding the maximum LTV will be closed (liquidated). The debt associated with the Chest is nullified and assimilated by the Stability Pool, with its collateral distributed among Stability Providers. Although the owner retains the full amount of borrowed USDs, the user experiences an overall loss in value. It is crucial to always maintain the ratio above the protocol-defined threshold to prevent liquidation.

Illiquid stability pool

In the rare occasion that the Stability Pool doesn't have enough liquidity, and a liquidation occurs, the system resorts to an alternative liquidation method known as redistribution. In this scenario, the system redistributes the debt and collateral from liquidated Chests among all other active Chests. The allocation of debt and collateral is proportional to the collateral amount of each recipient Chest.