Liquidations
No one wants to flip burgers forever. But the sad truth is some of us will put too many patties on the griddle, we'll loose track of our Stacks and we'll get fried...doomed to a life of low wages and low living at the burger stand.
Liquidations
Stack's $MORE token is a collateral-backed stablecoin, not algorithmic. Essentially, each $1 of $MORE is supported by at least $1 in collateral. As the collateral's market value varies, Stack, similar to many DeFi lending platforms, employs liquidations to maintain $MORE's overcollateralization.
Liquidations can happen one of two ways:
Price of the collateral drops in the market, causing the collateral value of a position to fall short of covering its borrowed amount. Each position has its own liquidation threshold, determined by the Maximum Collateral Ratio. When a Collateralized Debt Position (CDP) hits this threshold, it's open for liquidation, allowing anyone to repay the position in return for some of the collateral. See the example below.
Interest rates are hiked to manage
$MOREsupply. Borrowers forget to manage their positions and pay their fees, increasing the LTV beyond the MCR, triggering a liquidation. Users cannot let their borrowing fees (interest) increase indefinitely when rates are high.
It's crucial to understand that Stack operates as an isolated lending protocol. This means each CDP is handled separately. For users with multiple CDPs, each one will have its own set of liquidation criteria and processes.
Liquidation Example
Ronald has 10,000 LAMBO tokens, each is currently worth $1. LAMBO has a Maximum Collateral Ratio (MCR) of 80%, which means that if Ronald deposits $10,000 of LAMBO collateral, he can borrow up to $8,000 of $MORE.
Ronald decides to borrow $7,500 $MORE and quit flipping burgers.
Grimace watches Ronald's CDP, ready to liquidate at a moment's notice.
Unfortunately for our clown Ronald, the price of LAMBO drops from $1 to $0.90. Ronald's 10,000 LAMBO supply is now only worth $9,000 with $7,500 borrowed against it = 83% collateral ratio (LTV), higher than the 80% MCR. Ronald's CDP is now eligible for liquidation, and Grimace can step in to repay the debt.
Grimace swaps $7,500 of $USTB for $7,500 of $MORE on Pearl. He then pays off Ronald's CDP in exchange for a portion of the collateral. Given that the liquidation fee is 10%, Grimace gets to keep $7,500 of LAMBO (8333 LAMBO tokens) plus a 5% bonus (417 LAMBO) for keeping Stack protocol safe. The remaining 417 LAMBO go to the Stack Insurance Fund.
Altogether, Grimace earns 8,750 LAMBO, which, at a price of $0.90, is equivalent to $7,875. After subtracting his original investment of $7,500, we see that Grimace has earned $375 of profit.
When Ronald checks his Stack dashboard, he'll see he no longer has 10,000 LAMBO but instead has just 1,250 LAMBO left. Ronald gets to keep the 1,250 LAMBO and no longer needs to repay the original $7500 $MORE that he borrowed.
Welcome back, Ronald!!!
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