Example

Example: Bob vaulted $150 of BTC and borrowed the maximum (Ʉ100) of UNIT against it. Bob takes his Ʉ100 off-protocol and does degen things with it.

BTC drops 15%, as confirmed by Ducat's Oracle Network. Now, Bob has only Ʉ127.5 of BTC collateralising Ʉ100, and his Vault is precariously close to Liquidation.

Alice and Tom both notice that BobVault is facing potential jeopardy. Using a Ducat front-end, Alice pre-bids 81 UNIT for (90 UNIT, Ʉ94.5 of BTC) of BobVault. (If Bob is liquidated and Alice is the best bid, Alice would assume ownership of 90% of the BTC in Bob's vault for 81 UNIT, which Alice previously borrowed from her vault.)

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.

Tom, meanwhile, pre-bids the minimum 8.4 UNIT for (10 UNIT, Ʉ10.5 of BTC) in BobVault. In other words, he would take ownership of 10% of BobVault's BTC for 8.4 UNIT if Bob was liquidated and was the best bidder on at least 10 UNITs of BobVault's debt.

Then, BTC drops another 1.9%, as confirmed by Ducat's Oracle Network. BobVault now has Ʉ125 of BTC collateralising 100 UNITs, triggering a Liquidation.

BobVault incurs an immediate 16% (Ʉ20) Liquidation Penalty. This Ʉ20 is escrowed. Part of it will be allocated to BobVault's liquidatorIncentive, the percentage of each Vault's Liquidation Penalty that will be rewarded to Liquidators pro-rata. The rest will ultimately be remitted to the Ducat Treasury.

Alice's and Tom's bids are successfully filled, and 89.4 UNIT are instantly recapitalised within the same BTC block as BobVault's Liquidation. 10.6 UNIT remains in technical default to be retired via a Rolling Debt Auction (see next), leaving a de facto profit for the Protocol of (Ʉ20 liquidation - Ʉ10.6 repurchase - liquidatorIncentive = Ʉ9 - liquidatorIncentive), a profit of Ʉ9 + (90/100 * LiquidatorIncentive) for Alice, a profit of Ʉ1.6 + (10/100 * liquidatorIncentive) for Tom, and a loss of Ʉ20 for Bob.

The total supply of UNIT will ultimately decrease by Ʉ10.6 (once the balance of BobVault's debt is sterilised), as 89.4 of Bob's UNIT has been transferred to Alice & Tom within the same Bitcoin block as Bob's Liquidation. Alice and Tom, who had previously vaulted new BTC and borrowed 89.4 UNIT to participate in the Auction, would collectively own a blended position of the 89.4 UNIT with >= 150% collateralisation that they used to bid, combined with their winning bids for (Ʉ89.4 UNIT, Ʉ105 of BTC) from BobVault, now collateralised at 105/89.4 = 118%. Alice's and Tom's blended collateralisation ratio would be >= (150 + 105) / (89.4 + 89.4), i.e., at least 134%.

Alice and Tom would separately receive 90% and 10% allocations, respectively, from BobVault's LiquidatorIncentive, the percentage of BobVault's liquidation tax, which the Protocol will pay out to successful Liquidators over and above the amount of remaining Debt to be purchased.