Collateral Redemptions

Detailed description of Collateral Redemptions.

Stability Pool / Collateral Redemptions

The stability pool is a pool of SILK deposits used for liquidations of vulnerable positions that violate the system wide collateralization rules. When a vault’s LTV is too high, it will be marked for liquidation. When liquidated, SILK in the stability pool will be used to repay half of the outstanding debt, and the collateral backing the loan will be distributed to the stability pool depositors at a premium that is configurable per vault. The protocol will take a small percent of the liquidated collateral as revenue.

With overcollateralized minting on Shade Lend, liquidations will be a fair system using a stability pool. Most lending protocols in DeFi use a first-come-first-serve liquidation model which is an extremely competitive space that is completely dominated by bots. The barrier to entry is almost unachievably high, as the best liquidation bots will capture almost all liquidation value. With overcollateralized minting on Shade Lend, liquidations will be a fair system using a stability pool.

Below is an example of stability pool driven liquidations for isolated risk markets:

• User has $10,000 in BTC and $5,000 in debt. Maximum LTV for this loan is 60%.

• BTC drops 20% and the user’s deposited collateral is now only worth $8,000, making their LTV 62.5%.

• The liquidation discount for this vault is 10%. To restore solvency, half of the user’s debt is repaid by SILK in the stability pool, so $2,500 of SILK is taken from the stability pool and burned. $2,750 ($2,500 + 10%) of BTC is taken from the borrower’s collateral.

• Liquidation profit is calculated at $250. If the protocol’s share of liquidation profit is 20%, then $50 of BTC is sent to the protocol treasury, and the rest of the BTC ($2,700) is sent to the stability pool depositors as a claimable reward.

In the event that the protocol’s share would make a liquidation unprofitable for depositors, the protocol’s share is instead also given to the stability pool depositors.