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, ysyBOLD, 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 six collateral assets and there is no strict guarantee that it remains overcollateralized in case of a sudden collapse of a collateral asset.

Is there a lockup period?

There is no lockup period. Users are free to withdraw their collateral at any time.

Other considerations:

When the TCR (Total Collateral Ratio) of a branch falls below its Critical Collateral Ratio (CCR), the system imposes extra restrictions on borrowing in order to maintain system health and branch over-collateralization.

Here is the full CCR-based logic:

As a result, when TCR < CCR, the following restrictions apply:

Rationale:

The CCR logic has the following purposes:

• Ensure that when TCR >= CCR borrower operations can not reduce system health too much by bringing the TCR < CCR

• Ensure that when TCR < CCR, borrower operations only improve system health

In other words, if a user is attempting to withdraw collateral from the system but doing so would result in TCR < CCR, they will be unable to do so. This is a rare instance and typically caused by users going directly to the contracts (not recommended) instead of the USDaf DApp. In this rare instance, please Create a Ticket in the Asymmetry Discord here for assistance.

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.