Risks

How are collateral risks mitigated?

Liquity V2 will have three separate borrow markets for the different collateral types with their own Stability Pools (for efficient liquidations), user-set interest rates, and LTV factors for their respective assets (wBTC, tBTC, cbBTC, sUSDe, sDAI, sUSDS, sfrxUSD, scrvUSD).

Risks are mitigated through temporary borrowing restrictions in times of low collateralization of a given market, a redemption logic prioritizing collateral with less Stability Pool backing, and a collateral shutdown as an emergency measure to maintain system balance and protect against market instability.

Keep in mind that despite all these measures, USDaf remains dependent on the eight collateral assets and there is no strict guarantee that it remains overcollateralized in case of a sudden collapse of a collateral asset.

How does the system compartmentalize risk among different assets?

This depends on the party in question:

Borrowers: Collateral risk is limited to the collateral asset held by the borrower. A borrower isn’t negatively affected by a failure of another collateral asset.
USDaf Holders: As a multi-collateral stablecoin, USDaf is reliant on effective liquidations of undercollateralized loans in every borrow market to remain overcollateralized. Holders are subject to the risks of all supported collateral assets.
Earners: Stability Pool depositors only get exposure to the asset they have opted for. However, as USDaf holders, they are similarly affected by potential depegging.

What mechanisms are in place if the Stability Pool is empty?

If the Stability Pool doesn’t cover the full entire debt and gets completely emptied by the liquidation, the system falls back to the following liquidations modes.

The liquidator can freely choose between two fallback liquidation modes for the debt exceeding the funds in the Stability Pool:

Just-in-time (JIT) liquidation: the liquidator sends an amount of USDaf corresponding to the (remaining) debt in exchange for 105% of its nominal value.
Redistribution: the liquidator triggers a redistribution, through which the Trove’s entire debt and collateral is redistributed to all fellow borrowers of the respective collateral market, in proportion to their own collateral amounts. Thus, the respective borrowers will receive a share of the liquidated collateral and see their debts increase proportionally.

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Last updated 21 hours ago

How are collateral risks mitigated?

How does the system compartmentalize risk among different assets?

This depends on the party in question:

Borrowers: Collateral risk is limited to the collateral asset held by the borrower. A borrower isn’t negatively affected by a failure of another collateral asset.

USDaf Holders: As a multi-collateral stablecoin, USDaf is reliant on effective liquidations of undercollateralized loans in every borrow market to remain overcollateralized. Holders are subject to the risks of all supported collateral assets.

Earners: Stability Pool depositors only get exposure to the asset they have opted for. However, as USDaf holders, they are similarly affected by potential depegging.

What mechanisms are in place if the Stability Pool is empty?

If the Stability Pool doesn’t cover the full entire debt and gets completely emptied by the liquidation, the system falls back to the following liquidations modes.

The liquidator can freely choose between two fallback liquidation modes for the debt exceeding the funds in the Stability Pool:

Just-in-time (JIT) liquidation: the liquidator sends an amount of USDaf corresponding to the (remaining) debt in exchange for 105% of its nominal value.

Redistribution: the liquidator triggers a redistribution, through which the Trove’s entire debt and collateral is redistributed to all fellow borrowers of the respective collateral market, in proportion to their own collateral amounts. Thus, the respective borrowers will receive a share of the liquidated collateral and see their debts increase proportionally.