Liquidations in the EpsiLoan Ecosystem: Ensuring System Stability

In the EpsiLoan Protocol, liquidations play a crucial role in maintaining the stability and solvency of the protocol by ensuring that the entire stablecoin supply remains fully backed by collateral. Let's explore what liquidations entail and their significance within the EpsiLoan ecosystem:

Definition of Liquidations: Liquidations occur when Vaults fall below the minimum collateral ratio of 120%. This threshold serves as a critical safeguard to prevent the protocol from becoming undercollateralized, thereby maintaining the integrity and stability of the stablecoin supply. When a Vault breaches this minimum collateral ratio, it is deemed undercollateralized and is subject to liquidation.

Cancellation of Debt and Distribution of Collateral: When a Vault is liquidated, its debt is canceled and absorbed by the Stability Pool. This ensures that the stablecoin supply remains fully backed by collateral, preserving the overall stability and solvency of the protocol. Additionally, the collateral held within the liquidated Vault is distributed among Stability Providers, compensating them for their contributions to the Stability Pool.

Impact on Vault Owners: While the debt of the Vault is canceled and absorbed by the Stability Pool, the owner of the Vault still retains the full amount of yUSD borrowed. However, the value of their collateral is distributed among Stability Providers, resulting in an overall loss of approximately 16% for the Vault owner. Therefore, it is critical for Vault owners to maintain their collateral ratio above 120%, ideally targeting a ratio above 150%, to minimize the risk of liquidation and mitigate potential losses.

Ensuring System Stability: Liquidations serve as a mechanism to ensure the stability and solvency of the EpsiLoan protocol. By enforcing minimum collateral ratios and conducting liquidations when necessary, the protocol maintains a healthy balance between collateral and debt, safeguarding against potential insolvency risks and preserving the overall integrity of the stablecoin supply.

In summary, liquidations in the EpsiLoan ecosystem are designed to maintain system stability and ensure that the stablecoin supply remains fully backed by collateral. Through the cancellation of debt, distribution of collateral, and enforcement of minimum collateral ratios, liquidations play a vital role in safeguarding the protocol and protecting the interests of all participants within the EpsiLoan ecosystem.