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Liquidation – Everything half as bad

When are Vaults liquidated?

For each Vault on the DeFiChain, the owner of the Vaults has chosen a so-called Loan Scheme. This defines the necessary collateralization ratio, which has to be fulfilled at least, as well as the annual interest rate to be paid for the Vault. The following two loan schemes are available, for example, in addition to other models:

  • Minimum collateralization ratio: 150
    Interest rate: 5% annual interest
  • Minimum collateralization ratio: 200
    Interest rate: 2% annual interest

The minimum collateralization ratio means that a minimum amount of collateral in the form of cryptoassets must be available in the Vault during an active loan. The amount of collateral must be higher than the loan amount by at least the factor of the minimum collateralization ratio. If the collateral is worth less at any point in time (=> less than loan amount x min. collateralization ratio), the Vault will be liquidated.


Example:

– Loan amount: 1 dTSLA (incl. accumulated interest)
– Collateral: 500 DFI
– Loan model: 150% minimum collateral ration

Three scenarios:

  1. Scenario – Initial situation
    dTSLA oracle price: 1.000 USD
    DFI oracle price: 4 USD
    Total value of loan: 1 dTSLA x 1,000 USD/dTSLA = 1,000 USD
    Total collateral value: 500 DFI x 4 USD/DFI = 2,000 USD
    Current collateral ratio: 2,000 USD / 1,000 USD = 200%

    Result: All is well – collateral ratio (200%) is above the minimum collateral ratio (150%)

  1. Scenario – DFI price falls
    dTSLA oracle price: 1.000 USD
    DFI oracle price: 2.98 USD
    Total loan value 1 dTSLA x 1.000 USD/dTSLA = 1.000 USD
    Total collateral value: 500 DFI x 2.98 USD/DFI = 1.490 USD
    Current collateral ratio: 1.490 USD / 1.000 USD = 149%

    Result: Vault is liquidated – collateral ratio (149%) is below the minimum collateral ratio (150%)

  1. Scenario – dTSLA price increases
    dTSLA oracle price: 1.700 USD
    DFI oracle price: 4 USD
    Total loan value: 1 dTSLA x 1.700 USD/dTSLA = 1.700 USD
    Total collateral value: 500 DFI x 4 USD/DFI = 2.000 USD
    Current collateral ratio: 2.000 USD / 1.700 USD = 118%

    Result: Vault is liquidated – Collateral ratio (118%) is below the minimum collateral ratio (150%)

What exactly happens during liquidation?

If a vault is liquidated due to insufficient collateral, then the auction process of the vault’s collateral begins. One or more auctions are started for this purpose. The split of the auctions follows the following two rules:

  1. If multiple dTokens have been taken as loans, a separate auction (also called “batches”) is created for each dToken with the proportional amount of collateral.
  2. If a Vault has collateral in excess of $10,000, it will be split into multiple individual auctions (also called “batches”) so that no single auction has a value greater than $10,000.

A minimum bid is set for all auctions, based on the disbursed loan amount plus a liquidation penalty (5%). All bids must be made in the dToken in which the loan was disbursed.


Example:

– Loan amoun: 100 dTSLA (inkl. angesammelter Zinsen)
– Collateral: 1.500 DFI
– Minimum bid: 100 dTSLA + 5% liquidation penalty = 105 dTSLA

In our example, if a higher bid is placed than the minimum bid, all tokens above the minimum bid of 105 dTSLA will be issued to the owner/creator’s Vault at the end of the auction.

– Last bid: 125 dTSLA
– Payout to Vault owner: 125 dTSLA – 105 dTSLA (minimum bid) = 20 dTSLA

The remaining amount, which is not paid out to the Vault owner as residual value (i.e. the minimum bid – here 105 dTSLA), is exchanged back via DEX into DFI via DUSD and then burned.


Auction process:

  1. A Vault no longer has sufficient collateral and is liquidated.
  2. All collateral is split into one or more auction(s) – as described above.
  3. For each auction a minimum price of (loan + interest) x (1 + 5% liquidation penalty) is set.
  4. Now each auction is available for 720 blocks (about 6 hours).
  5. Everyone can bid and must either meet the minimum bid or place a bid which is at least 1% higher than the last bid.
  6. At the end of the auction, the amounts will be distributed as follows:
    1. All securities of the vault go to the highest bidder.
    2. The loan amount + the liquidation penalty (5%) will be exchanged for DFI and burned.
    3. The remaining amount, which exceeds the minimum bid, goes to the Vault owner (the amount remains in the Vault).
  7. The liquidation of the Vault is finished and the Vault owner can use the Vault again for new loans or just cash out the remaining amount (here dTSLA).

If no one bids on the Vault within the auction, the auction will restart after 720 blocks.

What can you do as the owner of the Vault?

As a Vault owner, you can limit your damage very much by acting cleverly. For example, the owner can bid at the auction of his Vault himself and make an excessive bid, which itself exceeds the value of the collateral. If the owner does this, he has only transaction costs except for the 5% liquidation penalty as well as possibly increased costs due to unbalanced DEX prices. Because by the auction of the vault the owner & highest bidder gets all collateral paid out and also the amount of his bid minus the loan amount (which he already owns anyway) and the 5% liquidation penalty.


Example:

– Loan amount: 1 dTSLA (incl. accumulated interests)
– Collateral: 300 DFI
– Minimum bid: 1 dTSLA + 5% liquidation penalty = 1,05 dTSLA

– Bid of the owner: 5 dTSLA

– Collateral paid out to the highest bidder (owner): 300 DFI
– Balance paid to the owner: 5 dTSLA – 1,05 dTSLA = 3,95 dTSLA
– Loan amount already in the owner’s possession: 1 dTSLA

Owner’s assets before liquidation:
– 300 DFI
– 5 dTSLA

Owner’s assets after liquidation:
– 300 DFI
– 1 dTSLA + 3,95 dTSLA = 4,95 dTSLA

Therefore, the loss to the Vault owner is only 0.05 dTSLA, which is the 5% liquidation penalty on the loan amount of 1 dTSLA.

Important:
In a real liquidation, there are transaction costs and possibly other costs (e.g. due to unbalanced DEX prices).

How can I participate in an auction?

It should be possible to participate in auctions via all wallets in the future. However, this is not yet the case today (as of 09.12.2021) and therefore we briefly present here the previous options that allow participation:

  1. DeFiChain Wallets – Download here
    1. On the command line in the desktop wallet or defi-cli (Windows & Mac OS)
    2. In the mobile wallet as a beta tester the function is also already available (iOS & Android)
      To do this, go to “Settings => About => Test beta features” and restart the app in necessary
  2. Saiive.live Wallets – Download here
    1. In the saiive.live mobile wallet (iOS & Android)
    2. In the saiive.live desktop wallet (Windows & Mac OS)

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