Liquidations and the Stability Pool

Introduction

The stability pool serves as a primary safeguard to ensure the solvency of the system. Its role is to provide the necessary liquidity to cover the debt from liquidated vaults, thereby guaranteeing that the total igUSD supply is always adequately collateralized.

Whenever a vault is liquidated, an equivalent amount of igUSD (corresponding to the remaining debt of the vault) is destroyed from the stability pool's balance to settle its debt. As a result, the entirety of the vault's collateral is transferred to the stability pool.

The stability pool is financed by users (known as stability providers) depositing igUSD into it. Over time, these stability providers witness a proportional reduction in their igUSD deposits, but in return, they gain a proportional share of the liquidated collaterals.

Given that vaults are usually liquidated at slightly below 120% collateral ratios, it is anticipated that stability providers will amass a larger usd value of collaterals relative to the debt they offset.

Benefits for Stability Providers

Stability providers benefit from financing the stability pool in several ways.

Collateral distribution

To start with, stability providers get access to discounted collaterals (from all the supported collaterals in Prisma) from liquidations without the need to spend gas or run liquidation bots.

As liquidations happen just below the MCR, which is greater than 100%, stability providers receive a discount of MCR - 100% on the liquidated collateral, thus experiencing a net gain when a vault is liquidated.

Assume a total of 2,000,000 igUSD exists in the stability Pool, and you've deposited 200,000 igUSD.

If a vault with 200,000 mkUSD debt and 300 rETH collateral faces liquidation when the rETH price is $666, and another with 100,000 igUSD debt and 200 wstETH collateral is liquidated at a wstETH price of $666, you'll be impacted based on your 10% pool share.

Specifically, your deposit will decrease by 10% of the liquidated debt, amounting to 30,000 igUSD. This means your deposit will diminish from 200,000 to 170,000 igUSD. In compensation, you'll acquire 10% of the liquidated collateral: 30 rETH and 20 wstETH. At the given price, this collateral is valued at $33,300, rendering you a net profit of $3,300 from the liquidation event.

Igurū Token Emissions

Furthermore, the stability pool is natively integrated into the Igurū emission system and therefore they accrue emissions while providing liquidity.

Stability providers can coordinate and vote to maximize the share of emission directed toward stability pool deposits

Liquidations

In order to maintain full collateral backing for the entire igUSD supply, vaults that descend beneath the minimum collateral ratio of 120% are subject to liquidation.

The debt associated with the liquidated vault is nullified and absorbed by the stability pool, and the collateral is redistributed amongst the stability providers.

Despite the liquidation, the vault owner retains the full amount of igUSD borrowed but suffers an overall loss up to 20% in value. Consequently, it is crucial for borrowers to maintain their collateral ratio above the minimum threshold of 120%, and ideally, they should aim to keep it above 150%.

Liquidators

Anyone can initiate the liquidation of an vault once its collateral ratio falls below the Minimum Collateral Ratio of 120%. To incentivize this action, the liquidator is rewarded with a gas compensation.

Liquidating vaults involves certain gas costs that the liquidator must bear. To mitigate these costs, the protocol allows batch liquidations of multiple vaults, reducing the cost per vault. However, to ensure liquidations remain profitable even when gas prices skyrocket, the protocol provides a gas compensation determined by the following formula:

Gas Compensation = 200 mkUSD + 0.5% of vault's Collateral

The 200 igUSD is sourced from the Liquidation Reserve, while the variable 0.5% portion is taken from the liquidated collateral. This slightly diminishes the liquidation gain for stability providers.

Liquidations rules

The way liquidations are enacted varies depending on certain conditions. This table elucidates all the different scenarios.

ICR = Individual Collateral Ratio

MCR = Minimum Collateral Ratio

GTCR = Global Total Collateral Ratio

SP = Stability Pool

Condition	Liquidation Behavior
ICR <=100%	Redistribute all debt and collateral (minus collateral gas compensation) to active vaults.
100% < ICR < MCR	The stability Pool igUSD is offset with an equal amount of debt from the vault. A fraction of the vault's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. Any remaining debt and collateral (minus collateral gas compensation) is redistributed to active vaults.
GTCR < 150% & MCR <= ICR < GTCR & SP igUSD >= vault debt	The protocol is in recovery mode. The stability Pool igUSD is offset with an equal amount of debt from the vault. A fraction of collateral with dollar value equal to 1.2 * debt is shared between depositors. Nothing is redistributed to other active vaults. Since its ICR was > 1.2, the vault has a collateral remainder, which is claimable by the borrower. The vault is closed.

Should liquidations occur while the stability pool is unfunded, what will happen?

When the stability pool lacks funds, an alternate liquidation process known as "redistribution" comes into play. In this scenario, the system reallocates the debt and collateral held within liquidated vault to all other vaults currently in existence. This reallocation is performed based on the collateral value of each receiving vault.