🗑️Stability Pool and Liquidations
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The Stability Pool 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 Asset portfolios—ensuring that the total PUST supply always remains backed.
When any Asset portfolio is liquidated, an amount of PUST corresponding to the remaining debt of the Asset portfolio is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Asset portfolio is transferred to the Stability Pool.
The Stability Pool is funded by users transferring PUST into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their PUST deposits, while gaining a pro-rata share of the liquidated collateral. However, because Asset portfolios 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.
Stability Providers will make liquidation gains (see below) and receive early adopter rewards in form of PALM tokens.
To ensure that the entire stablecoin supply remains fully backed by collateral, Asset portfolios that fall under the minimum collateral ratio of 110% will be closed (liquidated).The debt of the Asset portfolio is canceled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.The owner of the Asset portfolio still keeps the full amount of PUST borrowed but loses ~10% value overall hence it is critical to always keep the ratio above 110%, ideally above 150%.
Anybody can liquidate a Asset portfolio as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 PUST + 0.5% of the Asset portfolio's collateral) as reward for this service.
The liquidation of Asset portfolios is connected with certain gas costs which the initiator has to cover. The cost per Asset portfolio was reduced by implementing batch liquidations of up to 160 - 185 Asset portfolios 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 = 200 PUST + 0.5% of Asset portfolio's collateral
The 200 PUST 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.
As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a Asset portfolios is liquidated.
Let’s say there is a total of 1,000,000 PUST in the Stability Pool and your deposit is 100,000 PUST.
Now, a Asset portfolios with debt of 200,000 PUST and collateral of 400 ibTKN is liquidated at an ibTKN 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 PUST), i.e. from 100,000 to 80,000 PUST. In return, you will gain 10% of the liquidated collateral, i.e. 40 ibTKN, 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 ibTKN, if the USD value of ibTKN is expected to decrease.
First you need to open a Asset portfolios, borrow PUST, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in PALM) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule. Rewards will be the highest for early adopters of the system.
At any point in time, you can withdraw your pending rewards to your address.
As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration. However, you cannot withdraw while there are pending liquidatable Asset portfolioss.
There are two ways to withdraw from the stability pool. With the standard withdraw functionality, you will receive PUST as well as all the pending collaterals (from liquidations) you are eligible to receive. The secondary withdraw function will automatically sell any pending collaterals for PUST and then send all the PUST to your wallet. This functionality utilizes an approve "Router" which specifies a path to sell the collateral for PUST.
Down the line, we will be introducing a vault to auto-sell any liquidation rewards for PUST.
A Asset portfolios should always be liquidated prior to the value of its collateral falling below 100% of the value of its debt. As long as that is the case, stability pool depositors should not lose money.
In recovery mode, we have an additional check which says that the stability pool is not even involved if a liquidation involves a Asset portfolio with collateral ratio below 100%. In this case, the liquidation process does not go through the stability pool and instead debt/collateral is redistributed to active Asset portfolios.
But in the event of an oracle failure or a flash crash, it is possible that the liquidated collateral is worth less than the PUST taken from the stability pool. In this circumstance, an oracle could report that the Asset portfolios has a collateral ratio above 100% but this might not actually be the case. This is a situation where you may experience a loss as a Stability Pool Depositor.
If PUST is trading above $1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since PUST is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the PUST at a price above $1.
Please note that although Palm Finance has undergone multiple audits, a hack or a bug that results in losses for the users can never be fully excluded.
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 liquidated Asset portfolios to all other existing Asset portfolios.
A Asset portfolio can only be redistributed collaterals that it currently holds. I.e. if your Asset portfolio has no WETH, you won't be redistributed WETH in the event that a Asset portfolio with WETH gets liquidated while the stability pool is empty. Redistribution of debt occurs in a proportional fashion based on the RAV of collaterals in the Asset portfolio that is liquidated.
I.e. if a Asset portfolio has 20% RAV in WETH and 45% RAV in WETH, and 35% RAV in gOHM and gets liquidated, 20% of its debt will be proportionally redistributed to Asset portfolios with WETH based on their ownership of the total WETH in the system, 45% to Asset portfolios with WETH in the same fashion, and 35% of debt will go to Asset portfolios with gOHM in the same way.
Pure yield-bearing stablecoin strategies come with low liquidation risk because the dollar value of this collateral shouldn't drop. Low collateral ratio stablecoin strategies have minimal liquidation risk both in Normal Mode and Recovery Mode.
In both Normal and Recovery Mode, you will be eligible for liquidation if your Asset portfolio's collateral ratio is below 110%. But in Recovery Mode you are also eligible for liquidation if your AICR (Adjusted Individual Collateral Ratio) is less than TCR.
ICR < 110%
Liquidation
Liquidation
110% < ICR and AICR < TCR
Can't be liquidated
Liquidation
110% < ICR and 150% < AICR
Can't be liquidated
Can't be liquidated
If you keep your ICR above 110% and AICR above 150%, your Asset portfolio can never be liquidated under normal mode or recovery mode.
Stablecoin collateral has a ratio of 1.6 for the AICR calculation which means a lower ICR Asset portfolio is not going to be eligible for liquidation in recovery mode. For example if you have $10k of PUST debt along with $11k in stablecoin collateral, say with safety ratio of 1.05, your ICR will be 115.5% and your AICR will be 176%. For stablecoin Asset portfolios, if your Asset portfolio ICR is above 110%, your AICR will be above 150% too, meaning you can't be liquidated in Recovery Mode or in Normal Mode. We recommend keeping some threshold in case there are small movements in the stablecoin price. So if you're at a 115% Asset portfolios collateral on a purely stablecoin Asset portfolio, you should be comfortably safe from liquidation in all conditions except for a depeg in one of the stablecoins you've deposited as collateral.
If your stablecoin Asset portfolio is at ICR > 115%, you'll be safe from liquidation unless the stablecoin collateral depegs, in both normal and recovery mode.
