Decentralised Liquidation Auctions
The Decentralised Liquidation Auction describes the ability of users to offer a bid for a vault that hasn't defaulted but has a dangerously low LTC. The protocol's primary directive is to keep the peg and to prevent all unsterilised debt from creeping in. Therefore, we have created the Decentralised Liquidation Auction. In this auction, any number of users can detect and bid a non-zero amount for the collateral of a vault. This will allow the protocol to retire debt in a single block while incentivising a healthy ecosystem for Liquidators.
Decentralised Liquidation Auctions of BTC Vaults will have a Floor Pre-Bid of 84 cents on the dollar (i.e., 100 - LiquidationTaxRate). This is necessary to shield the Protocol from the risk of creating bad debt if Liquidators collude to place low bids during a mass-liquidation event where more assets are under Liquidation than there are Liquidators.
The leftover debt of the vaulted collateral, if any, that will not be retired after a decentralised auction can be calculated as:
This will determine the remaining unsterilisedDebt for the protocol to process through its auctioning mechanism.
As part of the incentives, the protocol will distribute a portion of the liquidation tax proportional to the amount of debt retired. This follows:
We can then calculate the discount at which the aggregated collateral was acquired. Considering the protocol liquidations tax.
The intent of this mechanism is to distribute the large majority of the Liquidation Net Revenue (liquidation tax less unsterilisedDebt from the Auction) to the new Liquidators as a reward for a) recapitalising the Protocol while it's under stress, and b) removing duration risk from the Protocol.
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