💥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 above 115%, ideally above 150%.

How is WEN protocol dealing with liquidations?

There are 3 common scenarios for liquidation:

Normal Case: Liquidation happens and stability pool is sufficient

Before liquidation:

Alice minted 100,000 wenUSD with a collateral value of $300,000 and CR 300% (safe)

Bob minted 50,000 wenUSD with a collateral value of $150,000 and CR 150% (safe)

Charlie minted 50,000 wenUSD with a collateral value of $57,000 and CR 114%(liquidated)

Stability Pool has 200,000 wenUSD

After liquidation:

Alice has still 100,000 wenUSD with a collateral value of $300,000 and CR 300% (unaltered)

Bob has still 100,000 wenUSD with a collateral value of $150,000 and CR 150% (unaltered)

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 net gained $7,000 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 empty or insufficient

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.

The redistribution of the collateral and debt is done in proportion to the recipient Trove's collateral amount.

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 300% (safe)

Bob minted 100,000 wenUSD with a collateral value of $150,000 and CR 150% (safe)

Charlie minted 50,000 wenUSD with a collateral value of $57,000 and CR 114%(liquidated)

Stability Pool only has 20,000 wenUSD remaining

After liquidation:

Alice now has 120,000 wenUSD with a collateral value of $322,800 and CR 268.17% (altered)

Alice's collateral increases by $22,800 with a new debt of 20,000 wenUSD, net gain$1,800

Bob has 110,000 wenUSD with a collateral value of $161,400 and CR 146.72% (altered)

Bob's collateral increases by $11,400 with a new debt of 10,000 wenUSD, net gain $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 net gained $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 chapter, liquidation would happen recursively until TCR > 150%.

This only happens in extreme conditions.

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.

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.

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