As a secondary measure to avoid the protocol going into extreme stress, the stability pool acts as a source of liquidity to repay debt from liquidated loans. It ensures that the total ARTH supply always remains backed by collateral.
When a loan postition is liquidated, an equivalent amount of ARTH corresponding to the remaining debt has to be burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral (committed by the borrower) is transferred to the Stability Pool as rewards to Stability Providers.
The Stability Pool is funded by users transferring their ARTH into the pool. These are also known as pooled users or stability providers.
Users that provide ARTH to the stability pool, do so to earn liquidation rewards.
Over time, the stability pool will lose some/part of their ARTH deposits, because the protocol uses the stability pool to repay debt from liquidated loans. Although, during the same instance, the pool gains share of the liquidated collateral (committed by the borrower at the time of procuring a loan).
Because, loan positions are always created at 110%+ CR and liquidated just below it, it is rationally accepted that the participants in the stability pool will always remain in a net positive position. The amount they receive from liquidated collateral will always remain more than the amount that was deducted to pay the liquidated position.
The only time that Stability pool providers can be in a net negative position is if the collateral is losing value at a significant pace. However, stability pool providers can immediately withdraw the collateral received from liquidations and sell their position if they feel collateral's value is decreasing at a significant pace against the USD. Have questions about Stability pools? Hop on to the stability pool section on our FAQs page.