How Liquidations Work
A key stabilizing mechanic of Ethos Reserve is liquidations. A liquidation occurs when your collateral ratio falls below the minimum required amount. In the event of liquidation, your position will be closed by the system, debt repaid, and collateral forfeited to the Stability Pool depositors.
You can avoid liquidations by ensuring there is a sufficient buffer between your personal collateral ratio and the minimum collateral ratio.
Liquidations occur at different collateral ratios for different collateral types, and each pool has its own liquidation parameters. These parameters are based on the associated collateral type’s risk profile.
If you haven’t read the previous section, you may be wondering what a Critical Collateral Ratio is. Also known as the CCR, this is collateral ratio at which you may be subject to liquidation during a period of Recovery Mode.
Recovery Mode Recovery Mode is triggered when a pool’s TCR falls below the CCR, and is designed to ensure that ERN always remains over-collateralized by a sufficient amount. Instances of recovery mode are rare, brief, and isolated to the associated collateral pool.
Ensure your personal collateral ratio stays above the critical collateral ratio for its pool to avoid liquidation. In practice, this means checking your position regularly and adding collateral or paying off debt as needed.
What oracle are you using to determine the price of collateral?
The protocol uses Chainlink price feeds, falling back to secondary oracles under the following (extreme) conditions:
Chainlink price has not been updated for more than 4 hours
Chainlink response call reverts, returns an invalid price or an invalid timestamp
The price change between two consecutive Chainlink price updates is >50%.
Please note that, although the system is diligently audited, a hack or a bug that results in losses for the users can never be fully excluded.
Liquidation Example (Stability Pool)
Say there is a total of 1,000,000 ERN in the Stability Pool and your deposit is 100,000 ERN.
A position with debt of 200,000 ERN and collateral of 23.6 BTC is liquidated at a BTC price of $10,000. The collateral ratio in this case is 118%.
Given that your pool share is 10%, your deposit will go down by 10% of the liquidated debt (20,000 ERN). In return, you will gain 10% of the liquidated collateral (2.36 BTC), which is currently worth $23,600. Your net gain from the liquidation is $3600.
Depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their exposure.
What happens if the Stability Pool is empty when liquidations occur?
If the Stability Pool is empty, the system uses a secondary liquidation mechanism called redistribution. The system redistributes the debt and collateral from liquidated positions to all other existing positions. The redistribution of debt and collateral is done in proportion to the recipient collateral amounts.
Liquidation Example (Stability Pool)
The example below demonstrates the redistribution of a position that is liquidated at 108% CR, assuming the Stability Pool is empty.
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