Liquidation

Understanding Liquidation in Universel Protocol: Safeguarding Stability

Why Does Liquidation Matter?

In Universel Protocol, liquidation serves as a crucial safeguard to ensure that the UUSD stablecoin remains fully backed by collateral assets. It steps in when a borrower's collateral rate falls below 150% of the minimum collateral rate, helping maintain the stability and integrity of the entire system.

The Liquidation Process:

During a liquidation event, a borrower's debt is reduced, enabling them to settle their obligations. In exchange for paying off the debt, liquidators receive the borrower's collateral asset. Post-liquidation, the borrower's reduced debt aligns with the remaining collateral, which equals 110% of the debt's reduced value.

Maintaining a Healthy Collateral Rate:

To preempt liquidation and its potential impact, it's highly advisable to uphold a robust collateral rate. A collateral rate above 150%, and ideally above 200%, serves as a protective buffer against the risk of liquidation.

Role of Liquidators: Guardians of Stability

Liquidators play a pivotal role in preserving the system's viability. By engaging as a liquidator, you contribute to the system's health by settling borrowers' debts when necessary. Your actions directly impact UUSD's stability and the total supply of UUSD.

Liquidation Mechanics:

In a liquidation scenario, up to 50% of the borrower's collateral is utilized to settle the debt. As a liquidator, you receive collateral assets equivalent to 109% of the repaid UUSD's value. Furthermore, a portion of the collateral asset, at least 0.5%, is allocated to the Keeper, ensuring a balanced reward mechanism.

The Keeper's Role: Nurturing System Integrity

Keepers monitor the state of liquidators and borrowers within the Universel Protocol, ensuring the system's smooth operation. Keepers have the power to initiate liquidation proceedings, promptly addressing potential risks.

A Practical Example:

Let's consider Tom, who deposits 10 ETH (~$14,800) and mints 10,000 UUSD with a collateral rate of 148%. John, a Liquidator, steps in to repay 3,000 UUSD on Tom's behalf. John receives wstETH worth 3,270 UUSD, while Cathy, a Keeper, is rewarded with wstETH worth 30 UUSD.

Benefits for Liquidators:

If you comprehend the process, you can act as a liquidator using the official liquidation tool, earning a rewarding 10% liquidation incentive. Alternatively, you can enable the liquidator feature and grant a third-party Keeper access to your funds, sharing a portion of the 10% liquidation reward.

Becoming a Liquidator: A Simple Path

You can become a liquidator by activating the Liquidator Feature, ensuring the automatic liquidation process runs smoothly. By enabling this feature, you unlock a 9% arbitrage profit whenever your UUSD balance converts to more wstETH through liquidation.

Overall Liquidation: A System-Wide Mechanism

In the event that the Universel Protocol's Overall Collateral Rate dips below 150%, users with a collateral rate under 125% might face full liquidation. The liquidator steps in to pay off the debt, receiving collateral assets in return. Keeper rewards remain consistent, bolstering the system's stability.

Your Role in Universel Protocol:

By participating as a liquidator, redemption provider, or Keeper, you actively contribute to UUSD's stability and the protocol's overall well-being. Always strive to maintain a healthy collateral rate, ensuring you're positioned to reap the benefits of participating in this groundbreaking financial ecosystem. Your engagement ensures not only your own financial security but also the vitality of Universel Protocol as a whole.