Temp Check: Liquidation Parameter Updates

Temperature Check
1

This temp check builds upon the initial Liquidation Parameter update temp check outlined here: https://gov.liqwid.finance/t/liquidation-parameter-updates/1156

During the past 48 hours following the drop in ADA price the protocol has had a wave of liquidation events, mostly from ADA backed loan positions. During volatile market conditions where collateral value is decreasing quickly it’s of upmost importance to have a properly tuned liquidation system. During the past few days the protocol successfully processed all liquidation transactions including under extreme chain loads and our core team will be releasing a report highlighting details of how the protocol performed during this volatile period in the coming days to weeks.

While the protocol’s liquidation engine performed as expected during this volatile period there are specific liquidation parameter updates the core team feels can make the system more robust during these moments of volatile price action and heavy chain load. These updates are ultimately aimed at protecting the lenders and all protocol users.

The following changes are proposed:

Update: After discussion with the core dev team this temp check and resulting proposal will focus on optimizing the window of profitability for liquidators to better account for liquidation events during volatile time periods. All updates to this proposal are reflected in this shift.

  1. Increase the liquidation bonus to 12% from 10% for the ADA, DJED and iUSD markets.

  2. Decrease the ADA, DJED and iUSD markets LiquidationThreshold0 from 80% to 75% (and from 55% to 50% for the SHEN market) to improve the profitability window for liquidators. This means Liqwid will now operate similarly to other CDP and lending/borrowing protocols such that liquidations will occur once a position reaches the maxLTV (minimum collateral ratio).

  3. Allow 100% of the loan to be liquidated at LiquidationThreshold0. Currently the protocol allows only 75% of a loan to be liquidated at LiquidationThreshold0 and 100% of the loan to be liquidated at LiquidationThreshold1 a few percentage points above the LiquidationThreshold0 LTV of 80% for the ADA and DJED markets. This will allow liquidators to fully close out unhealthy borrow positions in a single liquidation transaction, protecting the protocol especially during adverse and volatile market conditions.

  4. Provide a mechanism for incentivizing Liqwid liquidation bot operators with LQ. The community has supported this concept during past community governance calls and discussions and this would ensure a healthy set of liquidation bot operators are continuously available to repay unhealthy loans. An example of how this can be implemented would be tracking the liquidation token mints. Further technical implementation details should be researched for this feature but community discussion related to the amount of LQ distributed to liquidation bot operators can commence now (e.g. should the protocol incentivize liquidation bot operators with 100% of the amount of debt they repay? 50% or some other amount?). Community discussion should lead to a general consensus on what this amount should be with a focus on what’s the amount required to properly incentivize a robust set of liquidation bot operators given the updated liquidation parameters.

Do you support these liquidation parameter updates?

  • Yes
  • No

0 voters

3 Likes
2

I will vote in favour of all the changes.

Curious why there was even a buffer built in the first place?

1 Like
3

I will also vote in favor of it. When a flash crash happens, the bots don’t have an incentive to liquidate loans when it results in losing money. It will help to have a more robust liquidation system :+1:t4:

4

Thanks DC for putting up the above proposal. In essence I agree with most of the proposed changes. Below are my comments to each of the four points:

Point 1 : I agree to increase liquidation bonus to 20%.

Point 2 : Since we plan to allow 100% liquidation at LiquidationThreshold0 (as per point 3), why don’t we just let LiquidationThreshold0 for ADA, DJED and iUSD remain at 80%. As such, the borrower will lose the entire collateral once price is triggered at LiquidationThreshold0, instead of still having 4% (80 minus 76) of remaining supply. Maybe I’m missing something here, do let me know.

Point 3 : I agree to allow 100% of the loan to be liquidated at LiquidationThreshold0.

Point 4 : I’m neutral on this. Would love to see further discussion and refinement of ideas before I can make a decision. I think the priority now is for Point 1 to be passed first to increase incentives to liquidation bot operators immediately. I hope one day Liqwid can have its own liquidation pool (owned by LQ stakers) akin that of Indigo protocol; but I understand that Indigo has a much simpler liquidation mechanism since they only have one asset as collateral i.e. ADA.

5

As an active Liquidation BOT Operator I support this proposal.

One thing I’m not clear is if after this update we will still potentially have 2 liquidations thresholds for one loan? Thanks

6

Hey Giovanni @easy1staking if the updated liquidation parameters are voted in there would be 1 liquidation threshold where 100% of an unhealthy position can be repaid. So the LiquidationThreshold0 parameter would have a CloseFactor0 of 100%.

1 Like