Stability pool and liquidations

Stability Pools

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 CDPs—ensuring that the total LUCID supply always remains backed.

When any CDP is liquidated, an amount of LUCID 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 CDP is transferred to the Stability Pool.

The Stability Pool is funded by users transferring LUCID into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their LUCID deposits, while gaining a pro-rata share of the liquidated collateral. However, because CDP are likely to be liquidated at just below thethreshold collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

What are liquidations?

To ensure that the entire stablecoin supply remains fully backed by collateral, CDP that fall under the minimum collateral ratio of 110% will be closed (liquidated).

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

The owner of the CDP still keeps the full amount of LUCID borrowed but loses ~10% value overall hence it is critical to always keep the ratio above 110%, ideally above a threshold value based on the health factor of the CDP.

Who can liquidate risky CDPs?

Anybody can liquidate a CDP as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (200 LUCID + 0.5% of the CDP's collateral) as reward for this service.

How do I benefit as a Stability Provider from liquidations?

As liquidations happen just below a threshold collateral ratio, you will most likely experience a net gain whenever a CDP is liquidated.

Let’s say there is a total of 1,000,000 LUCID in the Stability Pool and your deposit is 100,000 LUCID.

Now, a CDP with debt of 200,000 LUCID and collateral of 400 ETH is liquidated at an Ether 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 LUCID), i.e. from 100,000 to 80,000 LUCID. In return, you will gain 10% of the liquidated collateral, i.e. 40 ETH, 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 ETH, if the USD value of ETH is expected to decrease.