Liquidation
Last updated
Last updated
Borrowers (minters) whose collateral rate falls below 150% of the minimum collateral rate must be liquidated to ensure that the eUSD stablecoin is fully backed by collateral assets.
During liquidation, the borrower's (minter's) debt is reduced, and liquidators receive the collateral asset in exchange for paying off the debt.
After liquidation, the borrower's (minter's) reduced debt is paid off, and the value of the remaining collateral equals 110% of the reduced debt.
It is highly recommended to always maintain a healthy collateral rate above 150%, preferably above 200%.
Liquidators are the first line of defense in preserving system viability. By becoming a liquidator (which currently can only be run by 3rd parties/bots), users can use their eUSD to settle any borrowers' (minters') debts at any time, maintaining the stability of eUSD and the total supply of eUSD. Liquidators are rewarded when liquidation proceeds.
When a borrower (minter) is being liquidated, up to 50% of the borrower's collateral is burned from the liquidator's balance to settle the debt. In return, the liquidator receives the collateral asset worth 109% of the value of the repaid eUSD, and at least 0.5% of the collateral asset goes to the Keeper.
Any third party can operate a Keeper Program to monitor the state of each liquidator and borrower (minter) on the Lybra Protocol.
When a borrower needs to be liquidated, the Keeper can choose to do so immediately using eUSD supplied by the appropriate liquidator in exchange for 1% of the liquidated assets.
Alice deposits 10 ETH (~$14,800) and mints 10,000 eUSD against her collateral.
Alice's Collateral Rate = 100% * 14800 / 10000 = 148%
Alice is at risk of getting liquidated, and the maximum amount that can be liquidated is 5 ETH.
Bob is a Liquidator holding 3,000 eUSD.
Cathy is a Keeper and decides to conduct liquidation on Alice.
Bob, the liquidator, repays 3,000 eUSD on Alice's behalf and receives stETH = 3000 / 1480 * 109% = 2.209459, worth 3,270 eUSD.
Cathy, the Keeper, receives stETH = 3000 / 1480 * 1% = 0.02027, worth 30 eUSD.
Alice's updated debt is 10,000 - 3,000 = 7,000 eUSD, her collateral is 10 - 2.209459 - 0.2027 = 7.77 ETH, and her current collateral rate is 1480 * 7.77 / 7000 = 164%.
Users familiar with deploying 3rd party liquidation bots can perform a liquidation on borrowers (minters) earning a 10% liquidation reward.
You can also enable the liquidator feature, grant a third-party Keeper access to your funds, and allow them to carry out the liquidation process in exchange for a portion of the 10% liquidation reward (9% to the liquidator and 1% to the Keeper).
Currently, only users deploying 3rd-Party Liquidation Bots can become Liquidators.
Those familiar and experienced with this process can expect to earn an additional 9% arbitrage profit whenever your account's eUSD balance is automatically converted to more stETH (or other LST) through liquidation.
When the Lybra Protocol Overall Collateral Rate falls below 150%, any user with a collateral rate below 125% may be fully liquidated. In this scenario, the liquidator only needs to pay X eUSD to obtain X * (current collateral rate - 1%) from the liquidated borrower (minter), while the Keeper's reward remains at 1%.
Note: If the Collateral Rate of the liquidated borrower (borrower) is below (100% + Keeper's Reward Ratio), the liquidation provider will receive X * current CR (not less than 100%) of stETH, while the Keeper gets no reward in this case.
For example,
When Overall Liquidation Mode is activated:
Alice deposits 10 ETH (~$12,400), borrows 10,000 eUSD, and her collateral rate is 100% * 12400 / 10000 = 124%, which can be fully liquidated.
Bob provides 10,000 eUSD in exchange for Alice's 10 ETH collateral. Once the full liquidation is complete, Alice's updated debt and collateral are both 0.
By understanding and actively participating in the Lybra Protocol as a liquidator, redemption provider, or Keeper, you can benefit from the various mechanisms designed to ensure the stability of the eUSD stablecoin and protect the overall system. Always remember to maintain a healthy collateral rate to minimize the risk of liquidation and maximize the potential benefits of participating in the protocol.
The additional step that has been added to boost fund safety on Lybra V2 during the eUSD liquidation process works as follows:
Whenever eUSD is converted to peUSD, the eUSD is locked in the mainnet contract.
This locked eUSD plays an important role in ensuring the safety of the funds. This is because the locked eUSD can be used to make flash loans that facilitate liquidation. To explain how these flash loans work, let’s take an example:
1. Bob borrows 10,000 eUSD from the "locked" eUSD pool and repays Alice's 9,000 eUSD debt.
2. Bob receives $10,000 stETH (the extra $1,000 stETH is a liquidation reward).
3. According to the terms of the flash loan, Bob is obligated to repay 10,000 eUSD. An additional 500 eUSD will be burned from Bob's wallet, transforming into interest that will then be distributed amongst eUSD holders.
4. Bob's earnings from the "Flash Loan + Liquidation" action incentivize more liquidators to conduct liquidations. This is because you now don't need to hold eUSD to be a liquidator. In this way, borrowing eUSD from the flash loan pool and repaying a slightly higher amount helps both in executing the liquidation process and in generating a profit.
Meanwhile, the liquidation process for peUSD on Lybra V2 remains broadly similar to the eUSD liquidation process. The only exception is that the global liquidation process that was in place on V1 has been removed for peUSD. This global liquidation process, referred to as “Overall Liquidation” in the docs meant that when the overall Lybra Protocol Collateral Rate fell below 150%, any user with a collateral rate below 125% could be fully liquidated. This will not apply to the liquidation process for peUSD on V2, thereby increasing the security of funds. This means, any borrower of peUSD, with a collateral ratio below 125% can be fully liquidated. The only other detail to take note of is that the source of the peUSD does not impact the liquidation process. Whether it was converted from eUSD or minted directly from Non-Rebase LSTs, the liquidation process remains the same.
