Stability Pool and Liquidations

About Stability Pool

The Stability Pool plays a crucial role in preserving the solvency of the system. It serves as a liquidity source to repay the debt from liquidated Troves, ensuring that the total SLSD supply remains fully backed at all times.

When a Trove is liquidated, an equivalent amount of SLSD to the remaining debt of the Trove is burned from the Stability Pool's balance to clear its debt.

In return, the entire collateral from the Trove is transferred to the Stability Pool. Users, known as Stability Providers, fund the Stability Pool by transferring SLSD into it. Over time, Stability Providers will see a reduction in their SLSD deposits in proportion to their share, while simultaneously gaining a proportional share of the liquidated collateral.

Given that Troves are likely to be liquidated at just below 110% collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

Liquidation process through Stability Pool

Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (20 SLSD + 0.5%) of the Trove's collateral) as reward for this service.

The liquidation of Troves is connected with certain gas costs which the initiator has to cover. The cost per Trove was reduced by implementing batch liquidations of up to 160 - 185 Troves 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 = 20 SLSD + 0.5% of Trove's collateral

The 20 SLSD 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.

Benefits to a Stability Providers

As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Trove is liquidated.

Let’s say there is a total of 1,000,000 SLSD in the Stability Pool and your deposit is 100,000 SLSD.

Now, a Trove with debt of 200,000 SLSD and collateral of 400 tokens is liquidated at a 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 SLSD), i.e. from 100,000 to 80,000 SLSD. In return, you will gain 10% of the liquidated collateral, i.e. 40 collateral token, 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 collateral, if the USD value of collateral is expected to decrease (for an exception see Can I withdraw my deposit whenever I want?).