Liquidation

What is Liquidation?

Liquidation is a process that comes into play when borrowers (referred to as "minters") find their collateral rate dropping below 150% of the minimum required collateral rate. This process is vital to ensure that the AquaUSD stablecoin remains fully backed by the collateral assets within the system.

During the liquidation process, the borrower's debt is reduced, and in exchange for settling this debt, liquidators receive the collateral asset.

Liquidation Criteria:

• Eligibility for Liquidation: An account becomes eligible for liquidation when its CR drops to 150% or lower. This threshold is set to protect against significant market volatility and potential losses.

It is highly recommended to always maintain a healthy collateral rate above 150%, preferably above 200%.

Liquidators

Liquidators serve as the primary defense in ensuring the system's stability. Users, often represented by third-party bots, can take on the role of liquidators. They use their AquaUSD holdings to settle borrowers' debts, which in turn, maintains the stability and total supply of AquaUSD. Liquidators receive rewards from the liquidation process.

During a borrower's liquidation, up to 50% of the borrower's collateral is used to settle the debt. In exchange, the liquidator obtains collateral assets valued minimum at 109% of the repaid AquaUSD, while 3% of the collateral asset goes to the Keeper. This mechanism incentivizes the efficient execution of liquidations and rewards participants accordingly.

Keepers

External entities have the option to establish a Keeper Program to oversee the activities of both liquidators and borrowers (referred to as minters) on the Aqua Protocol.

When a situation arises where a borrower requires liquidation, Keepers have the flexibility to execute the process promptly. They achieve this by using AquaUSD provided by the relevant liquidator, receiving 3% of the assets that are being liquidated as compensation for their role. This structure allows third parties to actively engage in the liquidation process and earn a percentage of the liquidation assets.

Example of partial liquidation:

Initial Setup

• Initial TON Value: 1 TON = $2.14.

• Alice's Deposit: 1,000 TON (approximately valued at $2,140).

• Minted AquaUSD: 1,050.

• Initial CR: Approximately 203.81%, calculated as (100% * $2,140) / 1,050.

Toncoin Price Drop

• Price Drop: TON's price decreases to $1.47.

• Position Duration: Open for one year.

• Accrued Borrowing Rate: 0.5% per annum.

• Accrued Borrowing Rate Fee: 1,050 AquaUSD * 0.5% = 5.25 AquaUSD.

• Updated Collateral Value: 1,000 TON * $1.47 = $1,470.

• Updated CR: Approximately 139%, calculated using the proportion method as $1,470 * 100% / (1,050 AquaUSD + 5.25 AquaUSD).

Calculation of Maximum Liquidation Amount

The liquidation amount is determined by a binary search algorithm so that the final Collateral ratio after liquidation and deduction of all fees is not less than 175%. Let's assume we have the following numbers in this case:

• Maximum Liquidation Amount: $645

Liquidation Process

• Bob's Action: Liquidates part of Alice's position by repaying 645 AquaUSD.

• Collateral Received by Bob: $703, calculated as 645 AquaUSD * 1.09 (equivalent to 478 TON).

• Keeper's Reward (Cathy): $19.35, calculated as 645 AquaUSD * 0.03 (equivalent to 13 TON).

Post-Liquidation Status

• Alice's Remaining Debt: 405 AquaUSD, calculated as 1,050 - 645.

• Repayment fee: 0.5% of the 645 liquidation amount, which equals 3.26 AquaUSD.

• Borrowing Rate and Repayment Fees Charged from Collateral: 5.8 TON, calculated as (3.26 AquaUSD + 5.25 AquaUSD) / $1.47.

• Remaining Collateral: 503.2 TON, calculated as 1,000 - 5.8 - 478 - 13 TON (worth $740).

• Updated CR: Approximately 183%, calculated as (100% * $740) / 405 AquaUSD.

How Do I Benefit as a Liquidator?

Experienced users who are capable of deploying third-party liquidation bots have the opportunity to execute liquidations on borrowers (minters) and earn a 12% liquidation reward.

Alternatively, you can activate the liquidator feature, providing third-party Keepers with access to your funds. By doing so, you enable them to conduct the liquidation process on your behalf. In return, you can share a portion of the 12% liquidation reward, with 9% going to the liquidator and 3% to the Keeper.

How to Become a Liquidator?

At present, becoming a Liquidator is limited to users who deploy third-party Liquidation Bots. Those who are well-versed and experienced in this procedure can anticipate earning an extra 9% in arbitrage profit whenever their AquaUSD balance undergoes automatic conversion to additional staked TON (or other LST) as a result of the liquidation process.

What is Overall Liquidation?

When Aqua Protocol's Overall Collateral Rate falls below 150%, users whose individual Collateral Rate is under 125% become susceptible to full liquidation. In these cases, a liquidator can acquire a portion of the borrower's collateral by paying an amount of AquaUSD, specified as X. The acquired collateral is calculated as X times the current collateral rate minus the sum of 3% (Keeper's reward), the borrowing rate fee, and the repayment fee. Despite these adjustments, the Keeper's reward remains consistently set at 3%.

Example of full liquidation:

When Overall Liquidation Mode is triggered:

Initial Setup

• Initial TON Value: 1 TON = $2.14.

• Alice's Deposit: 1,000 TON (valued at approximately $2,140).

• Minted AquaUSD: 1,050.

• Initial CR: Approximately 203.81%, calculated as (100% * $2,140) / 1,050.

Toncoin Price Drop

• Price Drop: TON's price decreases to $1.3.

• Position Duration: Open for one year.

• Accrued Borrowing Rate: 0.5% per annum.

• Borrowing Rate Fee: 1,050 AquaUSD * 0.5% = 5.25 AquaUSD.

• Updated Collateral Value: 1,000 TON * $1.3 = $1,300.

• Updated CR: Approximately 123%, calculated as $1,300 * 100% / (1,050 AquaUSD + 5.25 AquaUSD).

Calculation of Maximum Liquidation Amount

• Maximum Liquidation Amount: Full liquidation is eligible since CR < 125% - total 1,050 AquaUSD.

Liquidation Process

• Bob's Action: Liquidates Alice's position by repaying 1,050 AquaUSD.

• Borrowing Rate Fees: 0.5% of 1,050 AquaUSD = 4 TON (worth $5.25), paid to Aqua Protocol treasury.

• Repayment Fee: For AquaUSD ≥ $1000, a 0.50% fee applies, equating to 4 TON (worth $5.25), also paid to the treasury.

• Keeper Fee: Cathy, the Keeper, receives a 3% fee, amounting to 24 TON (worth $31.5).

• Liquidator Fee: Bob, the liquidator, receives the collateral, totaling 968 TON = 1000 - 4 -4 - 24 (worth $1,258) - a 19.8% profit.

Post-Liquidation Status

• Alice's Remaining Debt: Fully cleared to 0 AquaUSD.

• Remaining Collateral: Fully liquidated to 0 TON.

As a result, Bob earns a premium of 19.8% for successfully executing the liquidation, and 3% of the reward goes to the Keeper.

By actively participating in the Aqua Protocol as a liquidator, redemption provider, or Keeper, you can leverage the various mechanisms in place to uphold the stability of the AquaUSD stablecoin and protect the overall system. Always keep in mind the significance of maintaining a healthy collateral rate to minimize the risk of liquidation and maximize the potential rewards of your involvement in the protocol.

Liquidation Penalty

Total Penalty

• Minimum: A minimum penalty of 12% is applied to the liquidated position.

Distribution of Penalty

Partial Liquidation (CR > 125%)

• 9% to Liquidator: This portion of the penalty is given to the liquidator, incentivizing the liquidation process.

• 3% to Keeper: The remaining 3% is allocated to the Keeper, supporting the protocol's stability and financial health.

• Additional Fees: Both borrowing and repayment fees are additionally withdrawn from the user's collateral.

Full Liquidation (Overall CR < 150% and User's CR < 125%)

• In full liquidation, the liquidator pays an amount of AquaUSD (X) to acquire assets equivalent to X * (current collateral rate - 3% - Borrowing Fee - Repayment Fee) from the borrower.

• 3% to Keeper: The Keeper receives 3% of the penalty, contributing to the protocol's security.

• Additional Fees: Borrowing and repayment fees are also withdrawn from the user's collateral in full liquidation scenarios.

Special Considerations in Liquidation

• If the borrower's CR falls below the combined total of 100%, the Keeper's Reward Ratio, the Borrowing Fee, and the Repayment Fee, the liquidation provider is entitled to an amount equivalent to X times the current CR (not less than 100%) in staked Toncoins.

• In this scenario, neither the Keeper nor Aqua Protocol receives a reward, and both the Borrowing Fee and the Repayment Fee are waived.

Impact of Liquidations:

• Risk Management: The partial liquidation process, combined with the penalty structure, provides a balanced approach to managing risk, ensuring the protocol's and its users' interests are safeguarded.

• Opportunity for Account Recovery: By limiting liquidations to partial, users are given the opportunity to adjust their accounts and recover, rather than facing the total liquidation of their assets.

In summary, the liquidation process in Aqua Protocol is designed to protect both the user and the protocol from extreme market conditions. Through partial liquidations and a structured penalty system, Aqua Protocol ensures the stability of its platform while allowing users the chance to rectify their positions and maintain their involvement in the ecosystem.