Liquidation Pool
integrated solution for forced liquidations that keep the system healthy
Last updated
integrated solution for forced liquidations that keep the system healthy
Last updated
In order to keep USDA sufficiently backed by assets, a mechanism is put into place to liquidate unhealthy Vaults. Once the Liquidation Ratio of a Vault drops below the allowed treshold, the Vault is tagged for liquidation and the assets can be bought at a discount.
Since launch, we've democratised liquidations by releasing a way to participate in them without running complex off-chain infrastructure. This integrated solution is called the Liquidation Pool and is an opportunity accessible to anyone who wants to provide USDA as liquidation liquidity.
While previous participation in Liquidations required running specialized software, a shared pool of capital is provided where users can deposit USDA. Off-chain scripts are running and able to direct that USDA towards liquidations when they need to happen.
An example liquidation involving stSTX:
This approach has several advantages and benefits for Arkadiko:
A pool of capital purposed for liquidations, improving the stability and robustness of USDA in market downturn scenario’s.
A single staking use case for USDA with economic fundamentals backing it (liquidation discount)
Because of improved stability thanks to 1), we can increase loan-to-value for Vaults, creating more liquidity and extra efficiency.
This pool will work similar to most DeFi pooling mechanisms, where contributions and profits are split pro-rata your pool share. Do be aware that the USDA is used in liquidations, so it is effectively exchanged for discounted assets. When that happens, part of your USDA will turn into STX/stSTX/sBTC. You can then withdraw those tokens, sell them and add the USDA back into the liquidation pool or just enjoy the arbitrage profits. The user is responsible for managing his changing exposure due to Liquidations.
We can also only move the USDA for collateral purchases and not for withdrawals to any wallet. So it’s a decentralized and non-custodial solution, in the spirit of Arkadiko.
Arkadiko runs these scripts to help support the mechanism but by no means is this a requirement. Anyone can call a function on the smart contract to trigger the liquidation pool in liquidating Vaults. This means that the liquidation pool works completely decentralized. We just run the scripts as a courtesy towards the community.
The Liquidation Pool is currently a beneficiary of DIKO emissions, further increasing the profitability of providing USDA to it.
There is a lock-up mechanism for the USDA committed.
It is not ideal to have the pool fluctuate a lot in how much value is stand-by, we much prefer a stable amount of value being present there. Initial lock-up on USDA deposits is 30 days (4320 blocks). Lockups resets every time you deposit, be aware of this when compounding/redepositing! Epoch period is 5 days and DIKO rewards are distributed at the end of each epoch, pro-rata the USDA at the beginning of the epoch.
