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Stability Pool and Liquidations
The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Troves—ensuring that the total LCNY supply always remains backed.
When any Trove is liquidated, an amount of LCNY 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 LCNY into it (called Stability Providers). Over time Stability Providers lose a pro-rata share of their LCNY 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 Yuan-value of collateral relative to the debt they pay off.
Stability Providers will make liquidation gains and receive early adopter rewards in form of ALTR tokens.
To ensure that the entire stablecoin supply remains fully backed by collateral, Troves that fall under the minimum collateral ratio of
110%will be closed (liquidated).
The debt of the Trove is canceled and absorbed by the Stability Pool and its collateral distributed among Stability Providers.
The owner of the Trove still keeps the full amount of LCNY borrowed but loses
~10%value overall hence it is critical to always keep the ratio above
110%, ideally above
Anybody can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of
110%. The initiator receives a gas compensation (
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 = 2,000 LCNY + 0.5% of Trove's collateral (ETH)
2,000 LCNYis 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.
As liquidations happen just below a collateral ratio of
110%, you will most likely experience a net gain whenever a Trove is liquidated.
Let’s say there is a total of
10,000,000 LCNYin the Stability Pool and your deposit is
Now, a Trove with debt of
2,000,000 LCNYand collateral of
400 ETHis liquidated at an Ether price of
5450 CNY, and thus at a collateral ratio of
109% (= 100% * (400 * 5,450) / 2,000,000). Given that your pool share is
10%, your deposit will go down by
10%of the liquidated debt (
200,000 LCNY), i.e. from
800,000 LCNY. In return, you will gain
10%of the liquidated collateral, i.e.
40 ETH, which is currently worth
218,000 CNY. Your net gain from the liquidation is
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure to ETH, if the
LCNYvalue of ETH is expected to decrease.
First you need to open a Trove, borrow
LCNY, and deposit it to the Stability Pool. After making your deposit, you will start accumulating a reward (in ALTR) proportional to the size of your deposit on a continuous basis. The reward is calculated according to the rewards schedule and the kickback rate of the front end that you used for making the deposit. 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.
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 Troves with a collateral ratio below
110%that have not been liquidated yet.
- Chainlink price has not been updated for more than
- Chainlink response call reverts, returns an invalid price or an invalid timestamp
- The price change between two consecutive Chainlink price updates is
While liquidations will occur at a collateral ratio well above
100%most of the time, it is theoretically possible that a Trove 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.
LCNYis trading above
CNY, liquidations may become unprofitable for Stability Providers even at collateral ratios higher than
100%. However, this loss is hypothetical since
LCNYis expected to return to the peg, so the “loss” only materializes if you had withdrawn your deposit and sold the
LCNYat a price above
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.