Stability Pool and Liquidations

Introduction to the Stability Pool

The Stability Pool is a crucial component of the HLiquity protocol. It acts as the first line of defense in maintaining system solvency by providing liquidity to repay debt from liquidated Troves. This is guaranteeing that the total HCHF supply is consistently supported.

Role of Stability Providers

Stability Providers are users who transfer HCHF into the Stability Pool. Over time, they lose a pro-rata share of their HCHF deposits but gain a pro-rata share of the liquidated collateral. Because Troves are likely to be liquidated at just below 110% collateral ratios, Stability Providers are expected to receive a greater value of collateral relative to the debt they pay off.

Understanding Liquidations

Liquidation is a process that occurs when a Trove's collateral ratio falls below the minimum collateral ratio (MCR) of 110%. The remaining debt of the Trove is repaid by burning HCHF from the Stability Pool's balance, and the entire collateral from the Trove is transferred to the Stability Pool.

Compensation for Liquidating a Trove

When you liquidate a Trove, you are compensated with a liquidation gain. This gain is a share of the liquidated collateral, which is expected to have a greater value than the debt paid off.

Benefits for Stability Providers

Stability Providers benefit from liquidations in two ways. First, they receive a share of the liquidated collateral. Second, they earn HLQT tokens, which can be staked for fee earnings.

What Happens When the Stability Pool is Empty?

If the Stability Pool is empty when liquidations occur, the system activates a secondary liquidation mechanism called redistribution. The debt and collateral from liquidated Troves are redistributed to all other existing Troves in proportion to their collateral amount.

Conclusion

The Stability Pool plays a vital role in the HLiquity protocol by ensuring system solvency and providing benefits to Stability Providers. By understanding how the Stability Pool and liquidations work, users can make decisions and maximize their benefits from the HLiquity protocol.