# Liquidation

### What are liquidations?

To guarantee that all `wenUSD` are always fully over-backed by collateral, Troves with collateral ratios below 115% will be closed (liquidated). 

The Trove's debt will be canceled and absorbed by the Stability Pool while its collateral is distributed among Stability Providers. The Trove owner still keeps all the `wenUSD` borrowed but loses around 15% value of collateral overall. Therefore, **it is crucial to always maintain a ratio&#x20;**<mark style="color:red;">**above 115%**</mark>**, ideally above 150%**.&#x20;

### How is  WEN protocol dealing with liquidations?

There are 3 common scenarios for liquidation:&#x20;

#### Normal Case: Liquidation happens and stability pool is <mark style="color:green;">sufficient</mark>

#### `Before liquidation:`

Alice minted `100,000 wenUSD` with a collateral value of `$300,000` and CR <mark style="color:green;">`300%`</mark> <mark style="color:green;"></mark><mark style="color:green;">(safe)</mark>

Bob minted `50,000 wenUSD` with a collateral value of `$150,000` and CR <mark style="color:green;">`150%`</mark> <mark style="color:green;"></mark><mark style="color:green;">(safe)</mark>

Charlie minted `50,000 wenUSD` with a collateral value of `$57,000` and CR <mark style="color:red;">`114%`</mark><mark style="color:red;">(liquidated)</mark>

Stability Pool has `200,000 wenUSD`&#x20;

**`After liquidation:`**&#x20;

Alice has still `100,000 wenUSD` with a collateral value of `$300,000` and CR `300%` <mark style="color:green;">(unaltered)</mark>

Bob has still `100,000 wenUSD` with a collateral value of `$150,000` and CR `150%` <mark style="color:green;">(unaltered)</mark>

Charlie is liquidated, **loses** `$57,000` worth of collateral :(

Stability Pool has `150,000 wenUSD` remaining, plus `$57,000` worth of collaterals

The Stability providers <mark style="color:green;">**net gained**</mark><mark style="color:green;">**&#x20;**</mark><mark style="color:green;">**`$7,000`**</mark> worth of collateral profit.

In such a case, Stability Pool is enough to take care of liquidations.

#### Redistribution Case: Liquidation happens but stability pool is <mark style="color:red;">empty</mark> or <mark style="color:red;">insufficient</mark>

In such cases, the system redistributes the remaining debt and collateral from the (partially) liquidated Trove as well as the remaining under collateralized Troves to all existing positions.&#x20;

The redistribution of the collateral and debt is done **in proportion to** the recipient Trove's collateral amount.&#x20;

This means that Troves which are heavily collateralized will receive more debt and collateral from liquidated positions than those with low collaterals, ensuring the system does not create cascading liquidations.

#### `Before liquidation:`

Alice minted `100,000 wenUSD` with a collateral value of `$300,000` and CR <mark style="color:green;">`300%`</mark> <mark style="color:green;"></mark><mark style="color:green;">(safe)</mark>

Bob minted `100,000 wenUSD` with a collateral value of `$150,000` and CR <mark style="color:green;">`150%`</mark> <mark style="color:green;"></mark><mark style="color:green;">(safe)</mark>

Charlie minted `50,000 wenUSD` with a collateral value of `$57,000` and CR <mark style="color:red;">`114%`</mark><mark style="color:red;">(liquidated)</mark>

Stability Pool only has `20,000 wenUSD` remaining

**`After liquidation:`**&#x20;

Alice now has `120,000 wenUSD` with a collateral value of `$322,800` and CR <mark style="color:green;">`268.17%`</mark> <mark style="color:blue;">(altered)</mark>

Alice's collateral increases by `$22,800` with a new debt of `20,000 wenUSD`, <mark style="color:green;">**net gain**</mark>`$1,800`

Bob has `110,000 wenUSD` with a collateral value of `$161,400` and CR `146.72%` <mark style="color:blue;">(altered)</mark>

Bob's collateral increases by `$11,400` with a new debt of `10,000 wenUSD`, <mark style="color:green;">**net gain**</mark> `$1400`

Charlie is liquidated, net loses `$57,000` worth of collateral :(

Stability Pool has `0 wenUSD` left, plus `$22,800` worth of collaterals

The Stability providers <mark style="color:green;">**net gained**</mark> `$2,800` worth of collateral as profit.

When redistribution happens, users' CR would slightly decrease but gained profit.

#### Recovery Mode: The protocol's Total Collateral Ratio falls below `150%`

Details are in [Recovery Mode](https://docs.wenprotocol.io/how-it-works/recovery-mode) chapter, liquidation would happen recursively until TCR > `150%.`

{% hint style="info" %}
This only happens in *<mark style="color:red;">extreme conditions</mark>*.
{% endhint %}

### How can I benefit for liquidating a Trove?

When you liquidate a Trove, you are compensated for the gas costs of performing the transaction of liquidation and part of the liquidated collateral.&#x20;

Normally, each Trove liquidation required a lot of gas, but multiple liquidations at once reduce the gas costs per Trove. However, to ensure liquidations remain profitable even with high gas prices, the protocol provides gas compensation calculated as follows:

`Gas Compensation = 200 wenUSD + 0.5% of the collateral`

The `200 wenUSD` part is funded from Liquidation Reserve, while the 0.5% of the Trove's collateral comes from the liquidated collateral itself, which slightly reduces the liquidation gain for Stability Providers.&#x20;

### **What is the Liquidation Reserve?**

When opening a Trove and minting `wenUSD` :

* 200 `wenUSD` is set aside as a Liquidation Reserve to compensate gas costs if the Trove is liquidated
* The Liquidation Reserve is **totally refundable** if the Trove is not liquidated and is returned when closing the Trove by repaying the debt
* The Liquidation Reserve counts as part of the debt and slightly increases the collateral requirements by affecting the collateral ratio