Earn via the Stability Pool and Liquidations

Liquidation mechanism and stability pool overview

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Earn Yield through the Stability Pool

Similar to Liquity Protocol, users can earn and generate yield via the Stability Pool, which is the first line of defense in maintaining system solvency. It achieves this by acting as the source of liquidity to repay debt from liquidated Troves, ensuring that the total supply of USDF always remains fully backed. Stability pool deposits both absorb and cancel associated debt from Troves that have defaulted.

The Stability Pool is funded by users transferring USDF into it (otherwise known as Stability Providers). Over time, Stability Providers lose a pro-rata share of their USDF deposits, while gaining a pro-rata share of the liquidated collateral. However, because Troves are likely to be liquidated at just below 135% collateral ratios, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

Users can withdraw collateral from the stability pool at any time when there are no troves below 135% CR.

Depositors

Similar to Liquity, depositing USDF into the stability pool is effectively a way to gain exposure to their collateral. Stability Pool participants are rewarded with the acquisition of collateral from liquidated positions at a significant discount. Whenever liquidations occur, depositors are effectively buying the underlying collateral at a discount, usually around a 10% discount from market prices. Participants will also continuously receive an allocation of FPT tokens.

Redistribution

If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. In such a case, the system redistributes the debt and collateral from liquidated Troves to all other existing Troves. The redistribution of debt and collateral is done in proportion to the recipient Trove's collateral amount.

Single Stability Pool

There is only one stability pool in Fluid Protocol. This is to ensure there is enough collateral to handle large liquidations and prevent liquidity fragmentation, and also to make certain that FPT rewards are evenly distributed. Stability pool providers will earn exposure to their collateral.

Partial Liquidations

When a Trove is liquidated, the amount of USDF contained in the Trove multiplied by the Close Factor is burned from the Stability Pool’s balance to repay its debt.

In exchange, 110% of the corresponding dollar value amount of collateral from the Trove is transferred to the Stability Pool (minus 0.5% liquidation gas fee). For instance, if a user is liquidated on a 1000 USDF Trove at 130% CR, $500 in USDF will be repaid by the stability pool. $550 (110% of 500) of collateral is then sent to the stability pool (minus 0.5% liquidation gas fee). Now the Trove is left with 500 USDF debt and $750 in collateral, returning the user to a safe CR of 150%. Stability pool participants earn roughly the same fee as in Liquity (~10%). The Close Factor is hardcoded at 50%, the same factor used by Aave, Compound, and MAI. Partial liquidations are the norm in DeFi, used by Aave, Compound, and MAI among others. Fluid Protocol is the first Liquity-inspired protocol to use partial liquidations.

Benefits of Partial Liquidations

Partial Liquidations protect and therefore retain users in the protocol. Losing 10% of an entire Trove in one liquidation is a large financial loss for users. Most importantly, Partial Liquidations soften market impact from liquidation sell-offs, reducing the systemic risk of a Liquidation Cascade. Partial liquidations also reduce the amount of idle USDF needed to be sitting in the stability at a giving time, increasing overall efficiency of the system and the velocity of money.

Triggering Liquidations

Users can run liquidation bots or manually liquidate insolvent users without putting up any collateral. Therefore, the liquidation reward is relatively modest, as the only costs associated with liquidation are gas fees, which on Fuel Network are expected to be extremely low.

gas compensation = 0.5% of liquidated collateral

Gas compensation originates from liquidated collateral, slightly reducing the liquidation gain for Stability Providers. We do not include a fixed USDF gas compensation, as we expect the gas fees on Fuel Network to be exceptionally low. Not having a fixed USDF liquidation reserve also supports unlimited partial liquidations.