Stability Pool & Liquidations
Last updated
Last updated
The Stability Pool is the first line of defence in maintaining system solvency. It achieves this by acting as the source of liquidity to repay debt from liquidated Troves—ensuring that the total USDM supply always remains backed by collateral.
When any is liquidated, an amount of USDM 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 Trove is transferred to the Stability Pool.
The Stability Pool is funded by users transferring USDM into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their USDM deposits, while gaining a pro-rata share of the liquidated collateral. However, because Troves 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 and receive rewards in form of Meridian Stability Tokens (MST).
To ensure that the entire stablecoin supply remains fully backed by collateral, that fall under the minimum collateral ratio of 110% will be closed (liquidated).
The debt of the Trove is cancelled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.
The owner of the Trove still keeps the full amount of USDM borrowed but loses ~10% value overall hence it is critical to always keep the ratio above 110%, ideally above 150%.
Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (20 USDM + 0.5% of the Trove's collateral) as reward for this service.
The liquidation of Troves is connected with certain gas costs which the initiator has to cover. The cost per Trove was reduced by implementing batch liquidations of up to 160 - 185 Troves but with the aim of ensuring that liquidations remain profitable even in times of soaring gas prices the protocol offers a gas compensation given by the following formula:
gas compensation = 20 USDM + 0.5% of Trove's collateral (ETH)
The 20 USDM is funded by a Liquidation Reserve while the variable 0.5% part (in ETH) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
Let’s say there is a total of 1,000,000 USDM in the Stability Pool and your deposit is 100,000 USDM.
Now, a Trove with debt of 200,000 USDM 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 USDM), i.e. from 100,000 to 80,000 USDM. 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.
First you need to open a Trove, borrow USDM, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in MST) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule. Rewards will be the highest for early adopters of the system.
At any point in time, you can withdraw your pending rewards to your Ethereum address.
DIA price has not been updated for more than 4 hours
DIA response call reverts, returns an invalid price or an invalid timestamp
The price change between two consecutive DIA price updates is >50%.
If USDM is trading above $1, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than 100%. However, this loss is hypothetical since USDM is expected to return to the peg, so the “loss” only materialises if you had withdrawn your deposit and sold the USDM at a price above $1.
Please note that although the system is diligently audited, a hack or a bug that results in losses for the users can never be fully excluded.
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 Troves to all other existing Troves. The redistribution of debt and collateral is done in proportion to the recipient Trove's collateral amount.
As liquidations happen just below a collateral ratio of 110%, you will most likely experience a net gain whenever a is liquidated.
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 (for an exception see).
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 with a collateral ratio below 110% that have not been liquidated yet.
The protocol uses ETH:USD price feed, falling back to a direct relay price feed from the Chainlink price feed ETH:USD on Ethereum mainnet under the following (extreme) conditions:
While liquidations will occur at a collateral ratio well above 100% most of the time, it is theoretically possible that a 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.
