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Liquidations and Stability Pools

Introduction

Both stability pools serve as a primary safeguard to ensure the solvency of the system. Their role is to provide the necessary liquidity to cover the debt from liquidated vaults, thereby guaranteeing that the total mkUSD/ULTRA supply is always adequately collateralized.
Whenever a vault is liquidated, an equivalent amount of mkUSD/ULTRA (corresponding to the remaining debt of the vault) is destroyed from the corresponding stability pool's balance to settle its debt. As a result, the entirety of the vault's collateral is transferred to the corresponding stability pool.
The stability pools are financed by users (known as stability providers) depositing mkUSD/ULTRA into it. Over time, these stability providers witness a proportional reduction in their mkUSD/ULTRA deposits, but in return, they gain a proportional share of the liquidated collaterals.
Given that vaults are usually liquidated at slightly below 110% collateral ratios, it is anticipated that stability providers will amass a larger usd value of collaterals relative to the debt they offset.

Benefits for Stability Providers

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

Collateral distribution

To start with, stability providers get access to discounted collaterals (from all the supported collaterals in Prisma) 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 mkUSD exists in the stability Pool, and you've deposited 200,000 mkUSD.
If a vault with 200,000 mkUSD debt and 300 rETH collateral faces liquidation when the rETH price is $666, and another with 100,000 mkUSD debt and 200 wstETH collateral is liquidated at a wstETH 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 mkUSD. This means your deposit will diminish from 200,000 to 170,000 mkUSD. In compensation, you'll acquire 10% of the liquidated collateral: 30 rETH and 20 wstETH. At the given price, this collateral is valued at $33,300, rendering you a net profit of $3,300 from the liquidation event.

Prisma Token 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

Liquidations

In order to maintain full collateral backing for the entire mkUSD/ULTRA supply, vaults that descend beneath the minimum collateral ratio of 110% are subject to liquidation.
The debt associated with the liquidated vault is nullified and absorbed by the corresponding stability pool, and the collateral is redistributed amongst the stability providers.
Despite the liquidation, the vault owner retains the full amount of mkUSD/ULTRA borrowed but suffers an overall loss up to 20% in value. Consequently, it is crucial for borrowers to maintain their collateral ratio above the minimum threshold of 110%, and ideally, they should aim to keep it above 150%.

Liquidators

Anyone can initiate the liquidation of an vault once its collateral ratio falls below the Minimum Collateral Ratio of 110%. To incentivize this action, the liquidator is rewarded with a gas compensation.
Liquidating vaults involves 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. However, to ensure liquidations remain profitable even when gas prices skyrocket, the protocol provides a gas compensation determined by the following formula:
Gas Compensation = 200 mkUSD + 0.5% of vault's Collateral
The 200 mkUSD/ULTRA is sourced from the Liquidation Reserve, while the variable 0.5% portion is taken from the liquidated collateral. This slightly diminishes the liquidation gain for stability providers.

Liquidations rules

The way liquidations are enacted varies depending on certain conditions. This table elucidates 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 mkUSD/ULTRA 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 mkUSD/ULTRA 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.

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Should liquidations occur while the stability pool is unfunded, what will happen?

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.

Claiming liquidated collateral

Collateral transferred to the stability pool in the contexts of liquidations can be claimed by depositors. Before being able to claim the user must accrue its current apportioned amounts.
Operations which perform such an accruing are
  1. 1.
    Depositing to the pool
  2. 2.
    Withdrawing from the pool (also 0 amount)
  3. 3.
    Claiming Prisma rewards
To avoid an extra transactions the claimer can assess if the accrued value is up to date with the following client side check:
​
claimable = sp.getDepositorCollateralGain(account)
for i in range(len(claimable)):
if claimable[i] > 0:
assert sp.collateralGainsByDepositor(account, i) == claimable[i]
​
if this check passes, the user can call claimCollateralGains normally using the indexes with non zero claimable amounts in the claimable array. if this check fails, they must either:
  1. 1.
    claim any pending PRISMA rewards first
  2. 2.
    send a transaction to withdraw 0 mkUSD/ULTRA from the corresponding stability pool, updating the claimable balance.