Introduction to Liquidations
Liquidation is the process where collateral is sold from a vault in order to cover the USDA debt owed. This ensures that USDA is over-collateralized. Since vaults on Argo are independent of one another, the collateral of each position is isolated and only at risk of its own liquidation.
When a user opens a vault on Argo and borrows USDA, their
CR (collateral ratio) will be determined as:
The minimum CR required for opening a collateralized debt position is determined by the
ICR - the initial collateral ratio. For example, if an engine has an
ICR of 110%, that means $110 of collateral must be deposited in a vault to borrow a maximum of $100 USDA.
As time passes, the collateral ratio will fluctuate due to an increase of USDA debt (accrued borrow interest), collateral asset price volatility, or a combination of both factors. When the collateral ratio of a vault drops below the
MCR - maintenance collateral ratio, it will be marked for liquidation.
While a vault is marked, further borrow of USDA is restricted, and collateral cannot be withdrawn. However, users will have some time to deposit more collateral or repay USDA, in order to raise their collateral ratio above minimum. (In this event, the vault will be un-marked and can be used as normal). This time period is parameterized as the 'liquidation delay'.
During the liquidation process, collateral is sold via dutch auction to 3rd-party liquidators. The auction initiates an oracle-free collateral price via the formula:
The discount factor may depend on the engine, but will be set at 2 to begin with. As the auction proceeds, the discount factor drops, causing the price per unit collateral to also decrease. Note that the discount factor and rate of its decrease are adjustable parameters depending on engine type.
The bid process then proceeds in the following steps:
- A liquidator bot specifies a repayment of USDA
- The vault's debt is reduced by
- The system checks whether the new
- The liquidator receives ( / collateral price) value of collateral
If (3) fails, the transaction will revert all steps.
Note that, in step (2), a 1% liquidation penalty is taken out from the debt repayment. This penalty is based on the engine type, and can be found here. Liquidation penalties help prevent auction grinding attacks, and are paid to marker bots and the Argo treasury.
The process continues until the amount of USDA repaid (and the amount of collateral auctioned) causes the vault's CR to be between the
LCR (liquidation collateral ratio) and the MCR. The LCR varies between engines, but is always in between the MCR and ICR.
The XYZ engine has the following parameters:
Bob deposits 1000 XYZ tokens, worth $1.00/ea at time of deposit, into an Argo vault. Bob borrows the maximum amount, $500 USDA, against his XYZ collateral. Bob's position looks like this:
|XYZ||$1,000 (1000 XYZ)||$500||200%|
Some time passes, and XYZ is now worth $0.765/ea due to market volatility. Furthermore, Bob's USDA debt has accrued interest, and is now $510. Bob's position now looks like this:
|XYZ||$765 (1000 XYZ)||$510||150%|
Since the required MCR is 150%, Bob's vault is now marked for liquidation. Bob's collateral will now be auctioned until LCR of 160%. The auction starts at the initial collateral price of $1.53. As time goes on, the discount factor drops the price to $0.75. For simplicity, assume the current market price of XYZ is still $0.765.
Joe, a 3rd-party liquidator, notices that Bob's XYZ is at a discount to market price. Joe bids 75 USDA. Joe receives 100 XYZ tokens at $0.75, and Bob's debt is reduced by 0.99 * 75 = $74.25. Bob's position is now:
|XYZ||$688.50 (900 XYZ)||$435.75||158%|
Since 158% is between the MCR of 150% and LCR of 160%, the vault gets unmarked, and liquidation is complete.
Argo will open-source a basic bot for marking, un-marking, and liquidations. This bot must be supplied with APT, and is capable of flash-repaying loans by bidding on auctions, selling collateral, and re-paying USDA.
Liquidations for Vaults with Minimum Debt
There is a challenging edge case for users who only have minimum debt - 5 USDA. If a vault with near-minimum debt approaches the
MCR, it must be liquidated appropriately. As detailed in the liquidation process above, liquidators always specify the amount of liquidation before repaying. The smart contract then tells the liquidator bot how much USDA debt must be paid for that collateral.
- If the liquidator specifies too little, the repay amount could be less than 5 USDA, which would not cover the minimum debt; transaction will fail.
- If the liquidator specifies too much, the repay amount can be at maximum 5 USDA, and the liquidator could seize more collateral than necessary.
- If the liquidator specifies the exact, precise amount, the repay amount may not be possible, because liquidateAmount * auctionPrice can be over or under 5 USDA.
The simplest solution is to clear the entire vault. For example, at 5 USDA debt, and a
MCR of 200%, that means this vault has <$10 of collateral. At worst, the user loses $5.