Stability Pool & Liquidations

What is the Stability Pool?

The Stability Pool is the first line of defence in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Troves, ensuring that the total PUSD supply always remains backed.

When any Trove is liquidated, an amount of PUSD corresponding to the remaining debt of the Trove is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Trove is transferred to the Stability Pool.

The Stability Pool is funded by users transferring PUSD into it (called Stability Providers). Over time, Stability Providers lose a pro-rata share of their PUSD deposits, while gaining a pro-rata share of the liquidated collateral.

However, because 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.

Why should I deposit PUSD to the Stability Pool?

Stability Providers will make trove liquidation gains in BTC and receive rewards in the form of PDM tokens. Staked PDM tokens can earn a portion of revenue from 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 of 110% are subject to being closed (liquidated).

The debt of the Trove is canceled and absorbed by the Stability Pool, and its collateral is distributed among Stability Providers.

The owner of the Trove still keeps the full amount of PUSD borrowed but loses ~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 130%.

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: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.

Who can liquidate Troves?

Anyone can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 130%. The initiator receives a gas compensation (50 PUSD + 0.5% of the Trove's collateral) as a reward for this service.

How am I compensated for liquidating a Trove?

The liquidation of the trove 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.

In times of high gas prices, the protocol offers gas compensation given by the following formula:

  • gas compensation = 50 PUSD + 0.5% of Trove collateral (BTC)

The 50 PUSD is funded by a Liquidation Reserve while the variable 0.5% part (in BTC) 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 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 PUSD in the Stability Pool and your deposit is 100,000 PUSD.

Now, a Trove with a debt of 200,000 PUSD and collateral of 4 BTC is liquidated at a BTC price of $54,500, and thus at a collateral ratio of 109% (= 100% * (4 * 54,500) / 200,000).

Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 PUSD), i.e. from 100,000 to 80,000 PUSD. In return, you will gain 10% of the liquidated collateral, i.e. 0.4 BTC, 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 BTC if the USD value of BTC is expected to decrease (for an exception please read ‘Can I withdraw my deposit whenever I want?’ below.

Will I be rewarded for being an early adopter?

Yes. To do this, you first need to open a Trove, borrow PUSD, or purchase from the open market, and deposit it into the Stability Pool or DEX farming opportunity (while available).

After making your deposit, you will start accumulating a reward (in PDM) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule, which will be the highest for early adopters of the system.

You can withdraw your pending rewards to your wallet address at any point in time.

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 Trove with a collateral ratio below 110% that have not been liquidated yet.

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

While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Trove 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 PUSD is trading above $1 worth of BTC value, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since PUSD is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the PUSD at a price above $1 worth of BTC value.

BTC price is not compared to PUSD but rather USD value via Oracle price feeds. Borrower’s loans are subject to the same standards as all others and would have to increase BTC collateral as the price moves down if they are in jeopardy of liquidation.

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 the liquidated Trove to all other existing Troves. The redistribution of debt and collateral is done in proportion to the recipient Trove collateral amount.

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