Stability Pool and Liquidations

Vine Money's protocol includes a Stability Pool and liquidation mechanism, essential components ensuring the system's solvency and stability. Through strategic contributions to the Stability Pool, users play an active role in maintaining the system's health while receiving potential rewards from liquidated collateral. This section delves into how the Stability Pool functions and the process of liquidations, drawing on mechanisms similar to those seen in comparable DeFi protocols.

Liquidation Process

Liquidation can be triggered by anyone once a vault's collateral ratio dips below 150%. This action is performed through interaction with the relevant contract.

• Trigger for Liquidation: A vault is subject to liquidation if its collateral ratio falls below the minimum threshold, typically set at 150% to ensure a buffer against market volatility.

• Liquidation Mechanics: Upon liquidation, the vault's collateral is used to repay its outstanding debt. The remaining collateral, if any, is returned to the vault owner.

• Impact on Stability Pool: vUSD in the Stability Pool is used to offset the debt of the liquidated position. In exchange, collateral from liquidations is distributed among Stability Pool contributors.

$$\text{Debt Offset} = \text{Liquidated Debt Amount} \times \left( \frac{\text{User’s vUSD Contribution}}{\text{Total vUSD in Stability Pool}} \right)$$

To ensure vUSD remains fully collateral-backed, vaults falling below a 150% collateral ratio face liquidation. In such events, the vault's debt is canceled and absorbed by the stability pool, with the collateral being redistributed to stability providers. Vault owners, despite retaining their borrowed vUSD, incur a value loss. Therefore, borrowers are advised to keep their collateral ratio above 150%, preferably over 180%, to avoid liquidation risks.

Incentives for Liquidators

Liquidators receive a gas compensation to offset their costs and ensure profitability, even with high gas prices. The compensation is calculated as:

$$\text{Liquidation Rewards} = 10\, \text{vUSD} + 0.5\% \, \text{of Vault Collateral}$$

10 vUSD comes from the Liquidation Reserve, and the 0.5% is deducted from the liquidated collateral, slightly reducing the gains for Stability Pool providers.

The Stability Pool

• Primary Role: The Stability Pool acts as a primary line of defense against insolvency within Vine's system. It is the first line of response in repaying debts from liquidated collateral positions to ensure that vUSD is always over-collateralized.

• Mechanism: Users contribute vUSD to the Stability Pool, which is then used to offset the debt of liquidated collateral positions. In return, contributors receive a proportionate share of the liquidated collateral.

$$\text{User’s Payout} = \text{User’s vUSD Contribution} \times \left( \frac{\text{Total Collateral in Liquidated Position}}{\text{Total vUSD in Stability Pool}} \right)$$

Benefits for Stability Pool Contributors

• Collateral Distribution: Contributors receive a share of the collateral from liquidations, often at a favorable rate, as vaults are typically liquidated at slightly below the required collateral ratio.

• Incentives for Participation: Contributing to the Stability Pool is incentivized through the distribution of liquidated collateral, encouraging users to maintain a healthy pool size.

Managing Risk in the Stability Pool

• Volatility Considerations: Contributors need to be aware of the inherent risks, as the value of the received collateral is subject to market conditions.

• Balancing Contributions: Users must judiciously decide their level of contribution to the Stability Pool, balancing potential rewards against market volatility risks.