Liquidations

Liquidations

In order to ensure full collateral backing for the entireGREEN supply, as well as solvency of the protocol, vaults that decline beneath the minimum collateral ratio of 120% are subjected to liquidation.

The debt associated with the liquidated vault is nullified and absorbed by the corresponding Stability Pool, and the collateral is redistributed among the stability providers.

Despite the liquidation, the vault owner retains the full amount of GREEN borrowed but suffers an overall loss of 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 above150% or200%.

Liquidators

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

Liquidating vaults involve 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. The protocol provides liquidators with 0.5% - 1% of liquidating collateral.

Stability Pool

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 GREEN supply is always adequately collateralized.

Whenever a vault is liquidated, an equivalent amount ofGREEN (corresponding to the remaining debt of the vault) is burnt from the stability pool 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) depositingGREEN into it. Over time, these stability providers witness a proportional reduction in theirGREEN deposits, but in return, they gain a proportional share of the liquidated collateral as well as earning native yield on their share of GREEN.

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

Incentives for Stability Providers

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

Discounted Collateral

To start with, stability providers get access to discounted collaterals (from all the protocol supported collaterals) 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 GREEN exists in the stability Pool, and you've deposited 200,000 GREEN.

If a vault with 200,000 GREEN debt and 300 weETH collateral faces liquidation when the weETH price is $666, and another with 100,000 GREEN debt and 200 ezETH collateral is liquidated at a ezETH 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 GREEN. This means your deposit will diminish from 200,000 to 170,000 $GREEN. In compensation, you'll acquire 10% of the liquidated collateral: 30 weETH and 20 ezETH. At the given price, this collateral is valued at $33,300, rendering you a net profit of $3,300 from the liquidation event.

Protocol Incentives/Emissions

Furthermore, the stability pools are natively integrated into the Prima 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

Unfunded Stability Pool

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.

Liquidation Rules

The way liquidations are enacted varies depending on certain conditions. This table shows 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 $GREEN 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 mkUSD >= vault debt	The protocol is in Recovery Mode. The stability Pool $GREEN 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.