Stability and Liquidations

Zephyr utilizes an on-chain stability mechanism to ensure protocol solvency.

In the current design, Zephyr utilizes a stability pool. Future stability mechanisms will include with ICA-enabled liquidation strategies, such as executing swaps for backed stablecoins such as USDC or holding a delta neutral position on an IBC-enabled DEX.

Anyone with sufficient zUSD can liquidate a portfolio when its Total Collateral Ratio is less than 110%. However, the default liquidation mechanism that runs at the end of every block is managed by the Stability Pool.

Liquidations via Stability Pool

The stability pool is the fundamental stability mechanism in the Zephyr. The Stability pool is a source of liquidity used to repay debt from liquidated troves. When a trove is liquidated, the protocol burns an amount of zUSD that is equal to the trove debt, and the collateral of the trove is transferred to the Stability pool.

Stability pool Staking

Users can earn rewards by depositing zUSD into the stability pool.

Liquidations

Troves that are under the 110% ICR threshold will be automatically liquidated by the Stability pool. This provides an adequate buffer for slippage to ensure profits to stability pool stakers. In the scenario where troves hit liquidation at 110% collateral, stability pool liquidity providers would collectively profit ~10% the burned zUSD value.

Stability Pool Recovery

When the protocol's Total Collateral Ratio is less than 150%, the protocol enters recovery mode. During this state, troves with a collateral ratio under 150% may be liquidated.

Recovery Mode Liquidations

• ICR = Individual Collateral Ratio

• MCR = Minimum Collateral Ratio

• TCR = Total Collateral Ratio

• SP = Stability Pool

Condition	Liquidation mechanism
ICR <=100%	Redistribute all debt and collateral (minus ETH gas compensation) to active Troves.
100% < ICR < MCR & SP LUSD > Trove debt	LUSD in the Stability Pool equal to the Trove's debt is offset with the Trove's debt. The Trove's ETH collateral (minus ETH gas compensation) is shared between depositors.
100% < ICR < MCR & SP LUSD < Trove debt	The total Stability Pool LUSD is offset with an equal amount of debt from the Trove. A fraction of the Trove's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. The remaining debt and collateral (minus ETH gas compensation) is redistributed to active Troves.
MCR <= ICR < 150% & SP LUSD >= Trove debt	The Stability Pool LUSD is offset with an equal amount of debt from the Trove. A fraction of ETH collateral with dollar value equal to 1.1 * debt is shared between depositors. Nothing is redistributed to other active Troves. Since its ICR was > 1.1, the Trove has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Trove is closed.
MCR <= ICR < 150% & SP LUSD < Trove debt	Do nothing.
ICR >= 150%	Do nothing.