Stability Pool & Liquidations
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 Vaults, ensuring that the total USDL supply always remains backed.
When any Vault is liquidated, an amount of USDL corresponding to the remaining debt of the Vault is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Vault is transferred to the Stability Pool.
The Stability Pool is funded by users transferring USDL into it (called Stability Providers). Over time, Stability Providers lose a pro-rata share of their USDL deposits, while gaining a pro-rata share of the liquidated collateral.
However, because Vaults 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 Vault liquidation gains in PLS and receive rewards in the form of LOAN tokens. Staked LOAN tokens can earn a portion of revenue from the system.
To ensure that the entire stablecoin supply remains fully backed by collateral, Vaults that fall under the minimum collateral ratio of 110% are subject to being closed (liquidated).
The debt of the Vault is canceled and absorbed by the Stability Pool, and its collateral distributed among Stability Providers.
The owner of the Vault still keeps the full amount of USDL borrowed but loses ~10% value overall, hence it is critical to always keep the ratio above 110% – ideally above 150%.
The precise behavior of liquidations depends on the ICR of the Vault being liquidated and global system conditions: the total collateralization ratio (TCR) of the system, the size of the Stability Pool, etc.
Anyone can liquidate a Vault as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 USDL + 0.5% of the Vault's collateral) as reward for this service.
The liquidation of Vaults is connected with certain gas costs which the initiator has to cover. The cost per Vault was reduced by implementing batch liquidations of up to 160 - 185 Vaults but with the aim of ensuring that liquidations remain profitable.
In times of high gas prices, the protocol offers a gas compensation given by the following formula:
- gas compensation = 200 USDL + 0.5% of Vault's collateral (PLS)
The 200 USDL is funded by a Liquidation Reserve while the variable 0.5% part (in PLS) 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 Vault is liquidated.
Let’s say there is a total of 1,000,000 USDL in the Stability Pool and your deposit is 100,000 USDL.
Now, a Vault with a debt of 200,000 USDL and collateral of 400,000,000 PLS is liquidated at an PLS price of $0.000545, and thus at a collateral ratio of 109% (= 100% * (400,000,000 * .000545) / 200,000).
Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 USDL), i.e. from 100,000 to 80,000 USDL. In return, you will gain 10% of the liquidated collateral, i.e. 40,000,000 PLS, 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 PLS, if the USD value of PLS is expected to decrease (for an exception please read ‘Can I withdraw my deposit whenever I want?’ below.
Yes. To do this, you first need to open a Vault, borrow USDL, 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 LOAN) 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 PulseChain address at any point in time.
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 Vaults with a collateral ratio below 110% that have not been liquidated yet.
At deployment, the protocol aims to use Tellor’s PLS:USD price feed, falling back to the PulseX PLS:USD oracle under the following (extreme) conditions:
–– Tellor price has not been updated for more than 4 hours,
–– Tellor response call reverts and returns an invalid price or an invalid timestamp,
–– The price change between two consecutive Tellor price updates is >50%.
While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a Vault 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 USDL is trading above $1 worth of PLS value, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since USDL is expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the USDL at a price above $1 worth of PLS value.
PLS price is not compared to USDL 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 PLS collateral as price moves down if they are in jeopardy of liquidation.
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 Vaults to all other existing Vaults. The redistribution of debt and collateral is done in proportion to the recipient Vault's collateral amount.