All About Liquidation
What Happens during Liquidations?
TheStandard's main goal is to always have more value locked up as collateral than the value of loans given out. We call this being "provably overcollateralized." Here's how it works: When you borrow from TheStandard, you need to put in more collateral than you borrow. For every 100 USDs borrowed, you must put in at least $110 worth of collateral. We call this the "110% collateralization ratio."
Sometimes, the value of the collateral can drop, which is where liquidations come in. If the collateral value falls below $110 for every 100 USDs borrowed, the position can be liquidated. A liquidator pays off the debt (the borrowed USDs) and gets to keep the collateral. For example, if you borrowed 100 USDs with $120 of ETH as collateral, and the ETH value drops to $105, a liquidator could pay your 100 USDs debt and receive your $105 of ETH. This process ensures that all USDs in circulation are always backed by more real value in collateral, maintaining the stability and integrity of the entire system.
The Importance of Liquidations
Liquidations serve several critical functions:
Maintaining Overcollateralization: They ensure that the total value of collateral in the system always exceeds the value of borrowed assets.
Protecting the Protocol: By quickly addressing underwater positions, liquidations safeguard the protocol's overall health.
Ensuring Stablecoin Stability: Liquidations help maintain the peg of our stablecoin by ensuring it's always backed by sufficient collateral.
Understanding Collateralization Ratio
Before diving into liquidations, it's crucial to understand the collateralization ratio:
TheStandard requires a minimum collateralization ratio of 110%.
This means for every 100 USDs borrowed, users must provide at least $110 worth of collateral.
If the value of the collateral falls below this threshold, the position becomes eligible for liquidation.
The Liquidation Process
When a vault's collateralization ratio falls below 110%, it triggers the liquidation process:
The vault is flagged for liquidation.
Liquidators repay the vault's debt (in USDs).
In return, liquidators receive 110% of the debt value in collateral.
Example:
A vault has 100 USDs debt and $110 worth of ETH as collateral.
If ETH price drops and the collateral is now worth only $105, the vault is undercollateralized.
A liquidator repays the 100 USDs debt.
The liquidator receives $110 worth of ETH (at current prices), making a profit.
This process ensures that USDs are removed from circulation (burned) when collateral value decreases, maintaining the protocol's integrity.
Evolution of Liquidations in TheStandard
Version 3: Liquidation Pools
Utilized a complex system of liquidation pools.
Proved to be overly complex and gas-intensive due to on-chain filtering and distribution of multiple assets.
Version 4 (Current): Centralized Liquidations
TheStandard core team manages an internal process to liquidate undercollateralized vaults.
This temporary solution ensures protocol stability while we develop a more decentralized approach.
Version 4.1 (Upcoming): Decentralized Automated Liquidations
Will leverage Chainlink Automations and other technologies for on-chain liquidations.
Aims to adhere to TheStandard's goal of maximum decentralization.
Will reintroduce the ability for TST stakers to participate in and benefit from liquidations.
Benefits for TST Holders
One constant across all versions: TST holders are the ultimate beneficiaries of liquidations.
In V4.1, TST stakers will have the opportunity to participate directly in liquidations.
Profits from liquidations flow back to TST stakers, enhancing the token's value proposition.
Conclusion
Liquidations are a critical mechanism in TheStandard protocol, ensuring its stability, integrity, and overcollateralization. While our approach to liquidations has evolved to address technical challenges, our commitment to benefiting TST holders remains unwavering.
As we move towards Version 4.1, we're excited to reintroduce a fully decentralized, efficient liquidation process that aligns with our core principles and provides additional value to our TST stakers.
Stay tuned for updates as we continue to refine and improve this crucial aspect of our protocol!
Last updated