As part of the Altair release, we are launching a new liquidation mechanism as per SIP-15. Liquidation involves redeeming Synths for staked SNX if the stakers’ Collateralisation Ratio drops too low. This article will explain how this works in more detail.
What are the benefits of adding liquidation to the system?
- Liquidation provides intrinsic value to Synths by enabling direct redemption into the underlying collateral (SNX). This gives Synth holders confidence that the assets they hold can be directly exchanged for the SNX backing them. This is important because apart from the high C-Ratio there is currently little assurance for Synth holders that their Synths will be worth anything if there is a major (~90%) drop in the value of SNX.
- It creates a stronger incentive for stakers to maintain a healthy C-Ratio because they risk being bought out for some of their SNX at a discount if they don’t. Currently, they can simply forgo claiming staking rewards for as long as they choose.
- This in turn creates stronger incentives for a healthy network C-Ratio (visible on the Dashboard), as other network participants can actively improve the network C-Ratio by directly redeeming Synths for under-collateralised SNX.
- It provides a solution to staking wallets that have been abandoned or whose private keys have been lost, as they will no longer drag down the network C-Ratio.
How will liquidation work practically?
- If an SNX staker’s C-Ratio drops below 200%, then their wallet will be flagged as at-risk and subject to a two-week time delay. During this period, they can either add more SNX collateral or burn sUSD to increase their C-Ratio back to 800%.
- If, after the two week time delay period, the SNX staker’s C-Ratio is still below the target C-Ratio of 800%, then their SNX can be liquidated.
(Update — September 7, 2020: As per SCCP-25, the delay period has been changed to 3 days.)
- Anyone (e.g. Bob) can contribute to the liquidation of an under-collateralised staker (e.g. Alice). Bob calls the ```liquidateDelinquentAccount``` function, which burns his Synths, unlocks some of Alice’s staked SNX, and sends this SNX to Bob. These amounts are determined by the liquidation penalty, which determines what kind of bonus SNX Bob receives for liquidating Alice.
- Alice can only be liquidated up to a C-Ratio of 800%.
- All rates and time periods are configurable and subject to change as per approved SCCP’s.
What are the risks for stakers?
- The risk for stakers is that if they fail to manage their C-Ratio, then if it crosses the liquidation threshold then they only have a short period (currently two weeks) to fix it before they risk losing some of their SNX.
- If the SNX price could somehow be manipulated to decrease dramatically, it would need to be kept low for two weeks for stakers’ SNX to be at risk.
- Modelling shows that at a liquidation ratio of 200%, if liquidators were to burn sUSD to fix the staker’s C-Ratio up to 800%, then about 44% of the staker’s SNX collateral (including the liquidator’s SNX bonus) will be liquidated (i.e. transferred to liquidators) to repair the under-collateralised position.
How much SNX do liquidators receive?
Let’s assume the following conditions:
- Liquidation ratio: 200%
- Liquidation penalty: 10%
- Liquidation delay: 2 weeks
- SNX value: $1
Alice has staked 1000 SNX and her C-Ratio reaches 200%, which means she has a debt of 500 sUSD.
Alice doesn’t manage her C-Ratio during this time, so after 2 weeks her C-Ratio is still at 200%.
To work out how much sUSD will fix her ratio, he can use this formula:
S = (t * D - V) / (t - (1 + P) where:
- S = sUSD debt required to burn to fully fix Alice’s C-Ratio
- t = target C-Ratio (i.e. 8)
- D = debt balance (i.e. 500)
- V = value of staked SNX (i.e. 1000)
- P = liquidation penalty (i.e. 0.1)
This results in 434.7826086957 sUSD.
Bob can use 434.7826086957 sUSD to fix Alice’s C-Ratio to 800%, which gets burned to increase her C-Ratio to 800%.
The SNX he receives is calculated using this formula:
R = (S * (1 + P) where:
- R = SNX liquidation reward
- S = sUSD debt required to burn to fully fix Alice’s C-Ratio (i.e. 434.7826086957)
- P = liquidation penalty (i.e. 0.1)
This results in 478.2608695653 of Alice’s SNX going to Bob.
- In this scenario, Alice’s debt is reduced to 65.2173913043, and she still has 521.7391304344 SNX staked, with a C-Ratio of 800%.
Will escrowed SNX that’s been staked be available for liquidation?
- Not initially, but as per SIP-60 there are plans to deploy a new, more flexible escrow contract that will allow escrowed SNX to be liquidated.
Will there be a frontend interface for all actions relating to liquidation?
- Yes, they’ll be added in the upcoming Cinnabar product release.
Thanks for reading the Liquidation FAQs — if you’ve got any more questions, please come join us in Discord.