Stability Pool
The stability pool acts as a strong mechanism to substantially support the protocol by providing incentives to pooled users
To avoid the protocol going into extreme stress, the stability pool acts as a source of liquidity to repay debt from liquidated loans to ensure that the total ARTH supply always remains backed by collateral.
When a loan position 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.
Any user may deposit ARTH tokens to the Stability Pool. This allows them to earn the collateral from the liquidated Trove. When a liquidation occurs, the liquidated debt is canceled with the same amount of ARTH in the Pool (which is burned as a result), and the liquidated Ether is proportionally distributed to depositors.
Stability Pool depositors can expect to earn net gains from liquidations, as in most cases, the value of the liquidated Ether will be greater than the value of the canceled debt (since a liquidated loan will likely have an ICR just slightly below 110%).
The stability pool is currently deployed at
MAHA Issuance to Stability Providers
Stability Providers earn MAHA tokens continuously over time, in proportion to the size of their deposit. This is known as “Community Issuance”, and is handled by CommunityIssuance.sol.
Each Stability Pool deposit is tagged with a front end tag - the Ethereum address of the front end through which the deposit was made. Stability deposits made directly with the protocol (no front end) are tagged with the zero address.
When a deposit earns MAHA, it is split between the depositor and the front end through which the deposit was made. Upon registering as a front end, a front end chooses a “kickback rate”: this is the percentage of MAHA earned by a tagged deposit, to allocate to the depositor. Thus, the total MAHA received by a depositor is the total MAHA earned by their deposit, multiplied by kickbackRate.
The front end takes a cut of 1-kickbackRate of the MAHA earned by the deposit.
Stability Pool example
Here’s an example of the Stability Pool absorbing liquidations. The Stability Pool contains 3 depositors, A, B, and C, and the Growth peg:USD price is 100.
There are two loans to be liquidated, T1 and T2:
| Loans | Collateral (ETH) | Debt (ARTH) | ICR | ETH Value | Collateral Surplus |
|---|---|---|---|---|---|
T1 | 1.6 | 150 | 1.066 | 160 | 10 |
T2 | 2.45 | 225 | 1.088 | 245 | 20 |
Here are the deposits, before any liquidations occur:
| Depositor | Deposit | Share |
|---|---|---|
A | 100 | 0.1667 |
B | 200 | 0.3333 |
C | 300 | 0.5 |
Total | 600 | 1 |
Now, the first liquidation T1 is absorbed by the Pool: 150 debt is canceled with 150 Pool ARTH, and its 1.6 ETH is split between depositors. We see the gains earned by A, B, and C, are in proportion to their share of the total ARTH in the Stability Pool:
| Deposit | Debt absorbed from T1 | Deposit after | Total ETH gained | Deposit + ETH gain | Current ROI |
|---|---|---|---|---|---|
A | 25 | 75 | 0.2666 | 101.666 | 0.0166 |
B | 50 | 150 | 0.53333 | 203.333 | 0.0166 |
C | 75 | 225 | 0.8 | 305 | 0.0166 |
Total | 150 | 450 | 1.6 | 610 | 0.0166 |
And now the second liquidation, T2, occurs: 225 debt is canceled with 225 Pool ARTH, and 2.45 ETH is split between depositors. The accumulated ETH gain includes all ETH gain from T1 and T2.
| Depositor | Debt absorbed from T2 | Deposit after | Accumulated ETH | Deposit + ETH gain | Current ROI |
|---|---|---|---|---|---|
A | 37.5 | 37.5 | 0.675 | 105 | 0.05 |
B | 75 | 75 | 1.35 | 210 | 0.05 |
C | 112.5 | 112.5 | 2.025 | 315 | 0.05 |
Total | 225 | 225 | 4.05 | 630 | 0.05 |
It’s clear that:
Each depositor gets the same ROI from a given liquidation
Depositors' return increases over time, as the deposits absorb liquidations with a positive collateral surplus
Eventually, a deposit can be fully “used up” in absorbing debt, and reduced to 0. This happens whenever a liquidation occurs that empties the Stability Pool. A deposit stops earning ETH gains when it has been reduced to 0.
FAQs
Who funds the stability pool?
The Stability Pool is funded by users who transfer their ARTH into the pool. These users are also known as pooled users or stability providers.
Here is an example transaction of a user depositing ARTH into the stability pool.
Liquidation Rewards - Why deposit into the stability pool?
Users that provide ARTH to the stability pool, do so to earn liquidation rewards.
Over a certain period, the stability pool will lose some/part of their ARTH deposits, as the protocol uses the stability pool to repay bad debt from liquidated loans.
Although, during the same instance, the pool gains a share of the liquidated collateral (committed by the borrower at the time of procuring a loan).
As loan positions are always created at 110%+ CR and liquidated just below it, they are 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.
What will happen if the collateral value is decreasing significantly?
The only time that stability pool providers can be in a net negative position is when the collateral is losing value at a significant pace. In such a case, stability pool providers can immediately withdraw the collateral received from liquidations and sell their position if they feel that the collateral's value is decreasing significantly against the USD.
Why should I become a Stability Pool Provider?
Stability Providers deposit ARTH into the stability pool, which acts as a supplement to the Loan platform. Depositing ARTH flatcoin to the Stability Pool earns you liquidation rewards.
Whenever a loan position is liquidated, the collateral used to fund the loan (at 110%), is returned to the Stability Pool. Stability Providers always remain in a safe and net positive position.
Can you give me a real-life example of how the Stability Providers benefit by funding the Stability Pool?
Liquidations happen below a 110% Collateralization Ratio. Let's take a situation where:
Current ARTH Pooled in the stability pool:
$1,000,000or500,000 ARTH(assuming1 $ARTH = 2 USD)You deposit
$100,000or50,000 ARTHThus, you have a 10% stake in the Stability Pool
A loan position of
$200,000gets liquidated at109%collateral RatioCollateral liquidated = Loan taken out * CR% / Current Price of ETHie,($200,000* 109%/3000) =72.66 ETH
What do you pay:
Given that your pool share is 10%, your
ARTHdeposit will go down by 10% (theARTHyou added into the Stability Pool is used to settle the debt into the system) of the liquidated debtTotal Debt to be settled =
200,000 USDYour Debt Share = 10%
Your Debt share =
20,000 USD(10% of Total Debt)Your initial ARTH position:
100,000 USDYour new ARTH position:
80,000 USD(Initial Position - Your Debt Share) .
What do you get:
In return, you will gain 10% of the liquidated collateral (
72.66 ETH), i.e.7.26 ETH, which is currently worth$21,780(Current ETH price: $3000). Your net gain from the liquidation is$1,780 USD
Note that depositors can immediately withdraw the collateral received from liquidations and sell it to reduce their ETH exposure, if the USD value of ETH is expected to decrease even further.
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