Basic Mechanics

Liquidations are the key mechanism by which UNIT's supply is kept in balance with the amount of exogenous collateral (BTC), thereby preventing the accumulation of bad debt.

The collateralLiquidationThreshold, or CLT, is a DUCAT-governance-controlled parameter. Initially, there will be one kind of collateral (BTC) with a CLT of 125% (i.e., if a Vault's collateralisation falls to 125%, it will be liquidated within the next BTC block.)

The Protocol's liquidation process will be as decentralised as possible, i.e., new users use their capital to liquidate defaulted Borrowers. However, educating users on conducting this process will take some time, and the liquidation process needs to work on day 1. Therefore, we will have a two-track liquidation auction system: a "Decentralised Liquidation Auction" and a "Centralised Liquidation Auction."

In the Decentralised Auction (the preferred outcome), the Protocol flags the Vaults closest to Liquidation and invites users to pre-bid on all or part of that Vault's assets if the Vault triggers a Liquidation. Once the Liquidation is triggered, the assets are transferred within the same BTC block.

If a Vault is liquidated without external bidders, the Protocol assumes ownership of the Vault's assets (its BTC) and liabilities (its UNIT loan). To keep UNIT supply and demand in balance, the Protocol must retire debt equal to the amount of the liquidated UNIT loan.

The Protocol will run a rolling auction of defaulted UNIT debt, paying a BTC premium for other users' UNIT until the balance of {defaultedDebt} equals zero.