Key Features of Liquidation

Trigger Mechanism

• The protocol continuously monitors CDPs to assess their collateralization ratio.

• If the ratio falls below the minimum collateralization threshold, the liquidation process is initiated automatically.

Auction Process

• Liquidated collateral is put up for auction to a valid bidder.

• Bidders, often known as Keepers, compete to purchase the collateral, ensuring market-driven pricing.

Liquidation Fee

• A liquidation fee is imposed on the user whose position is liquidated.

• This liquidation fee is designed to discourage risky behavior and compensate the protocol for the added system risk.

Keeper Rewards

• Keepers are incentivized with rewards for participating in the liquidation process.

• Rewards typically include a portion of the liquidation fee and opportunities to acquire discounted collateral.

Debt Repayment

• The proceeds from the auction are used to repay the outstanding USDD debt.

• Any remaining collateral after repaying the debt and penalties is returned to the user.

Peg Stability Impact

• Liquidation ensures that excessive debt does not destabilize the peg of USDD.

• By swiftly resolving undercollateralized positions, the protocol maintains its financial health.