Stability Vault & Liquidations

What is the Stability Vault?

The Stability Vault 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 Troves, ensuring that the total $CASH supply always remains backed. In return, the collateral from the liquidated position is transferred to the Stability Vault.

To enhance liquidity and streamline the reward distribution process, the collateral is automatically converted into the system’s stablecoin and distributed proportionally to Stability Providers. Unlike traditional models, where rewards are received in the form of collateral and require manual claims, the Stability Vault ensures that rewards are seamlessly reinvested, maintaining system efficiency and minimizing liquidity disruptions.

By participating in the Stability Vault, users benefit from liquidation gains while earning additional rewards, reinforcing the stability and sustainability of the ecosystem.

Can I lose money by depositing funds in the Stability Vault?

While liquidations will occur at a collateral ratio most of the time, it is theoretically possible that a Trove gets liquidated 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.

How Do I Benefit from Liquidations as a Stability Provider?

As a Stability Provider, you earn profits when a position is liquidated due to insufficient collateral. In such cases, the Stability Vault burns an equivalent amount of stablecoins to settle the debt. The liquidated collateral is then converted into stablecoin and added back to the vault, strengthening system liquidity.

This automated process ensures that your earnings are continuously reinvested, compounding over time without manual intervention. By participating, you not only maximize your returns but also contribute to the overall stability and efficiency of the ecosystem.

Let’s say the total stablecoin in the Stability Vault is 100,000 $CASH, and you have deposited 10,000 $CASH, giving you a 10% share of the vault.

Now, a position is liquidated:

• Debt (stablecoin): 20,000 $CASH

• Collateral: 2,500 units of collateral (valued at $22,000)

When the collateral hits its liquidation threshold and is liquidated, the Stability Vault steps in to maintain system balance. It burns 20,000 $CASH to cover the outstanding debt, while the liquidated collateral is seamlessly transferred to the vault. This automated process not only ensures stability but also reinforces liquidity, allowing the ecosystem to function efficiently. As a Stability Provider, you benefit from these liquidations through compounded earnings, maximizing returns without manual intervention.

Since your share in the Stability Vault is 10%, your deposit is reduced by 10% of the liquidated debt, which amounts to 2,000 $CASH(20,000 × 10% = 2,000). This brings your deposit down from 10,000 $CASH to 8,000 $CASH.

In return, you receive 10% of the liquidated collateral, which equals 250 units of the collateral (2,500 × 10% = 250).

If the collateral is valued at $8.80 per unit, the 250 units would be worth $2,200 (250 × 8.80 = 2,200). This collateral is then automatically converted into $CASH and reinvested into your vault balance. As a result, you gain a net profit of 200 $CASH (2,200 - 2,000), bringing your total deposit to 10,200 $CASH in your vault balance.

This seamless process ensures continuous rewards and helps maintain the stability and liquidity of the system.

What are liquidations?

To ensure that the entire stablecoin supply remains fully backed by collateral, Troves that fall under the minimum collateral ratio are subject to being closed (liquidated).

What’s the Liquidation Logic?

The precise behavior of liquidations depends on the individual collateralization ratio (ICR) of the Trove being liquidated and global system conditions, such as the system's total collateralization ratio (TCR) and the size of the Stability Vault.

Who can liquidate Troves?

Anyone can liquidate a Trove once it drops below the individual Collateral Ratio(ICR). The initiator receives a gas compensation as a reward for this service.

When will I get liquidated?

You will be liquidated if your Trove exceeds the maximum allowable loan-to-value (LTV) ratio established by the protocol. In this event, your Trove will be fully closed, and your collateral will be liquidated, with the proceeds distributed among the Stability Providers. You will not be required to repay the debt.

To prevent liquidation, it is crucial to maintain a low LTV relative to other Troves within the system, ensuring that you do not exceed the maximum LTV threshold. If your collateralization ratio falls below the required level, liquidation will occur to safeguard the overall stability of the system.

Can I withdraw my deposit whenever I want?

As a general rule, you can withdraw the deposit made to the Stability Vault at any time. There is no minimum lockup duration.