As a part of the Altair launch, we’re launching a brand new liquidation mechanism as per SIP-15. Liquidation includes redeeming Synths for staked SNX if the stakers’ Collateralisation Ratio drops too low. This text will clarify how this works in additional element.
What are the advantages of including liquidation to the system?
- Liquidation supplies intrinsic worth to Synths by enabling direct redemption into the underlying collateral (SNX). This provides Synth holders confidence that the belongings they maintain could be instantly exchanged for the SNX backing them. That is necessary as a result of other than the excessive C-Ratio there’s at present little assurance for Synth holders that their Synths shall be price something if there’s a main (~90%) drop within the worth of SNX.
- It creates a stronger incentive for stakers to take care of a wholesome C-Ratio as a result of they danger being purchased out for a few of their SNX at a reduction in the event that they don’t. Presently, they’ll merely forgo claiming staking rewards for so long as they select.
- This in flip creates stronger incentives for a wholesome community C-Ratio (seen on the Dashboard), as different community individuals can actively enhance the community C-Ratio by instantly redeeming Synths for under-collateralised SNX.
- It supplies an answer to staking wallets which have been deserted or whose non-public keys have been misplaced, as they may now not drag down the community C-Ratio.
How will liquidation work virtually?
- If an SNX staker’s C-Ratio drops beneath 200%, then their pockets shall be flagged as at-risk and topic to a two-week time delay. Throughout this era, they’ll both add extra SNX collateral or burn sUSD to extend their C-Ratio again to 800%.
- If, after the 2 week time delay interval, the SNX staker’s C-Ratio remains to be beneath the goal C-Ratio of 800%, then their SNX could be liquidated.
- Anybody (e.g. Bob) can contribute to the liquidation of an under-collateralised staker (e.g. Alice). Bob calls the “`liquidateDelinquentAccount“` operate, which burns his Synths, unlocks a few of Alice’s staked SNX, and sends this SNX to Bob. These quantities are decided by the liquidation penalty, which determines what sort of bonus SNX Bob receives for liquidating Alice.
- Alice can solely be liquidated as much as a C-Ratio of 800%.
- All charges and time durations are configurable and topic to vary as per accepted SCCP’s.
What are the dangers for stakers?
- The danger for stakers is that in the event that they fail to handle their C-Ratio, then if it crosses the liquidation threshold then they solely have a brief interval (at present two weeks) to repair it earlier than they danger shedding a few of their SNX.
- If the SNX worth might by some means be manipulated to lower dramatically, it could should be saved low for 2 weeks for stakers’ SNX to be in danger.
- Modelling exhibits that at a liquidation ratio of 200%, if liquidators had been to burn sUSD to repair the staker’s C-Ratio as much as 800%, then about 44% of the staker’s SNX collateral (together with the liquidator’s SNX bonus) shall be liquidated (i.e. transferred to liquidators) to restore the under-collateralised place.
How a lot SNX do liquidators obtain?
Let’s assume the next situations:
- Liquidation ratio: 200%
- Liquidation penalty: 10%
- Liquidation delay: 2 weeks
- SNX worth: $1
Alice has staked 1000 SNX and her C-Ratio reaches 200%, which suggests she has a debt of 500 sUSD.
Alice doesn’t handle her C-Ratio throughout this time, so after 2 weeks her C-Ratio remains to be at 200%.
To work out how a lot sUSD will repair her ratio, he can use this system:
S = (t * D - V) / (t - (1 + P) the place:
- S = sUSD debt required to burn to totally repair Alice’s C-Ratio
- t = goal C-Ratio (i.e. 8)
- D = debt stability (i.e. 500)
- V = worth of staked SNX (i.e. 1000)
- P = liquidation penalty (i.e. 0.1)
This ends in 434.7826086957 sUSD.
Bob can use 434.7826086957 sUSD to repair Alice’s C-Ratio to 800%, which will get burned to extend her C-Ratio to 800%.
The SNX he receives is calculated utilizing this system:
R = (S * (1 + P) the place:
- R = SNX liquidation reward
- S = sUSD debt required to burn to totally repair Alice’s C-Ratio (i.e. 434.7826086957)
- P = liquidation penalty (i.e. 0.1)
This ends in 478.2608695653 of Alice’s SNX going to Bob.
- On this situation, Alice’s debt is decreased to 65.2173913043, and she or he nonetheless has 521.7391304344 SNX staked, with a C-Ratio of 800%.
Will escrowed SNX that’s been staked be obtainable for liquidation?
- Not initially, however as per SIP-60 there are plans to deploy a brand new, extra versatile escrow contract that may enable escrowed SNX to be liquidated.
Will there be a frontend interface for all actions referring to liquidation?
- Sure, they’ll be added within the upcoming Cinnabar product launch.
Thanks for studying the Liquidation FAQs — in the event you’ve received any extra questions, please come be a part of us in Discord.