Stability Pool and Liquidations

This document provides an overview of the Stability Pool and liquidation process within the ZolTAO ecosystem. It discusses the role of Stability Providers, the benefits of participating in the Stability Pool, and the potential risks associated with depositing funds.

The Stability Pool

1. Purpose: The Stability Pool acts as the first line of defense in maintaining system solvency by repaying debt from liquidated Troves, ensuring the total dCNY supply always remains backed.

2. Stability Providers: Users who deposit dCNY into the Stability Pool are called Stability Providers. They lose a pro-rata share of their dCNY deposits and gain a pro-rata share of the liquidated collateral, which usually results in a net gain.

3. Benefits: Stability Providers make liquidation gains and receive early adopter rewards in the form of TAO tokens.

Liquidations

1. Liquidation process: Vaults falling below the minimum collateral ratio of 110% will be liquidated. Their debt is canceled and absorbed by the Stability Pool, while their collateral is distributed among Stability Providers.

2. Initiating liquidations: Anyone can liquidate a Vault that drops below the minimum collateral ratio of 110%. The initiator receives a gas compensation (1,375.68 dCNY + 0.5% of the Vault's collateral) as a reward for this service.

3. Liquidation compensation: The protocol offers a gas compensation given by the formula: gas compensation = 1,375.68 dCNY + 0.5% of Vault's collateral (ETH).

Benefits for Stability Providers

1. Liquidation gains: As liquidations typically occur just below a collateral ratio of 110%, Stability Providers usually experience a net gain when a Trove is liquidated.

2. Early adopter rewards: Stability Providers accumulate rewards (in TAO) proportional to the size of their deposit on a continuous basis according to the rewards schedule.

Withdrawals and Potential Risks

1. Withdrawal rules: Stability Providers can withdraw their deposit at any time, with no minimum lockup duration. However, withdrawals are temporarily suspended when there are liquidatable Troves with a collateral ratio below 110% that have not been liquidated yet.

2. Risks: Although liquidations generally result in gains, it is theoretically possible to experience a loss due to flash crashes, oracle failures, or if dCNY is trading above ¥1. Additionally, while the system is thoroughly audited, a hack or bug resulting in user losses cannot be fully excluded.

3. Empty Stability Pool: If the Stability Pool is empty when liquidations occur, the system uses a secondary liquidation mechanism called redistribution, where debt and collateral from liquidated Troves are redistributed to all other existing Troves in proportion to their collateral amount.

The Stability Pool plays a crucial role in maintaining the solvency of the ZolTAO ecosystem by repaying debt from liquidated Troves. Stability Providers benefit from liquidation gains and early adopter rewards while contributing to the overall stability of the system. Understanding the liquidation process, the role of Stability Providers, and the potential risks associated with participating in the Stability Pool is essential for users in the ZolTAO ecosystem.