Increase Liquidation Penalties

Proposal ID
9vgSPG7zDd3Q1AeXDTm7RUHtVph8JevwAzE9fpnA9t6N

Currently, liquidation of the debts against USDT/USDC deposits is troublesome since withdrawals of the specified collaterals is congested. To improve that, we propose to increase liquidation penalties for all assets in accordance with Liquidation Penalty Guidelines:

Goals:

  1. liquidation is lucrative for liquidator,
  2. liquidation improves health of the borrower;
| Asset | Liq. threshold now | Liq. penalty now | Liq. penalty Proposed |
| ----- | ------------------:| ----------------:| ---------------------:|
| USDN  |                95% |               5% |                 12.5% |
| EURN  |                80% |              10% |                   30% |
| ETH   |                75% |               8% |                   40% |
| BTC   |                65% |               8% |                   50% |
| WAVES |                70% |              10% |                   50% |

Transaction Payload

{
  "type": 12,
  "version": 2,
  "data": [
    {
      "key": "DG2xFkPdDwKUoBkzGAhQtLpSGzfXLiCYPEzeKH2Ad24p_LiquidationPenalty",
      "type": "integer",
      "value": 125
    },
    {
      "key": "DUk2YTxhRoAqMJLus4G2b3fR8hMHVh6eiyFx5r29VR6t_LiquidationPenalty",
      "type": "integer",
      "value": 300
    },
    {
      "key": "474jTeYx2r2Va35794tCScAXWJG9hU2HcgxzMowaZUnu_LiquidationPenalty",
      "type": "integer",
      "value": 400
    },
    {
      "key": "8LQW8f7P5d5PZM7GtZEBgaqRPGSzS3DfPuiXrURJ4AJS_LiquidationPenalty",
      "type": "integer",
      "value": 500
    },
    {
      "key": "WAVES_LiquidationPenalty",
      "type": "integer",
      "value": 500
    }
  ],
  "senderPublicKey": "3gQ8QUfoGQW6YVuhUv3zuqsbmxbV5F2FAuDXJqVKD6C9",
  "fee": 50000000,
  "feeAssetId": "WAVES",
  "timestamp": 1656068686420
}
1 Like

I think this is what the proposal is trying to solve:
Imagine an account is supplying USDC and borrowing a lot of BTC, and the health has turned negative.
If someone liquidates the account, they take the USDC collateral and BTC debt.
But because of the lack of USDC liquidity, they would need to bring in outside funds to repay the borrowed BTC. And they may not have any outside funds. So they would be stuck with the BTC debt.
The higher liquidation penalty makes it easier for a liquidator to take on the BTC debt and repay it.

The likely reason that borrowing has been disabled is that the Vires team fears that people will attempt to borrow whatever is available and abandon their USDC/USDT collateral. So if this proposal passes, people will have a much harder time doing that, and borrowing will probably be reenabled.

2 Likes

So if I understand this right, the idea is to take a larger chunk of the USDC or USDT that the person put up for collateral when the liquidation occurs, so that the liquidator gets a more attractive deal, and the ratio after liquidation of the remaining debt is healthier than it would be before this change. That means more USDC or USDT would be released back into Vires for people to withdraw, or borrow, correct?