Stability Pool and Liquidations

Safeguarding System Solvency in EpsiLoan

In the EpsiLoan ecosystem, the Stability Pool serves as a critical component for maintaining system solvency and ensuring the stability of the protocol. Let's delve into how the Stability Pool functions and its role in managing liquidations:

Source of Liquidity for Repaying Debt: The Stability Pool acts as the primary source of liquidity to repay debt from liquidated Vaults. In the event of a Vault liquidation, an amount of yUSD equivalent to the remaining debt of the Vault is burned from the Stability Pool's balance to settle the outstanding debt. This mechanism ensures that the total supply of yUSD remains fully backed, maintaining the stability and integrity of the protocol.

Transfer of Collateral and Debt Repayment: When a Vault is liquidated, the entire collateral held within the Vault is transferred to the Stability Pool. Simultaneously, the corresponding amount of yUSD needed to repay the Vault's debt is burned from the Stability Pool's balance. This exchange ensures that the liquidated collateral effectively covers the outstanding debt, mitigating the impact of liquidations on the protocol's solvency.

Role of Stability Providers: The Stability Pool is funded by users who transfer yUSD into it, known as Stability Providers. Over time, Stability Providers may experience a reduction in the value of their yUSD deposits as they contribute to covering the debt from liquidated Vaults. However, they also gain a pro-rata share of the liquidated collateral, balancing the impact of their contributions.

Expected Benefits for Stability Providers: Despite the potential reduction in the value of their yUSD deposits over time, Stability Providers are expected to receive a greater dollar-value of collateral relative to the debt they help pay off. This is because Vaults are typically liquidated at collateral ratios slightly below 120%, resulting in a surplus of collateral compared to the remaining debt.

In summary, the Stability Pool plays a crucial role in safeguarding system solvency within EpsiLoan by providing liquidity for debt repayment from liquidated Vaults. Through the contributions of Stability Providers and the efficient management of liquidations, the Stability Pool ensures the stability and resilience of the protocol, contributing to a secure and reliable borrowing environment for users.