Redemptions and Liquidations

Differences Between Redemptions and Liquidations

Redemption is a mechanism that allows users to reduce their exposure to the collateral of their choice in the specific Trove that is redeemed.

Liquidation occurs when a Trove is fully closed after it exceeds the maximum LTV required by the protocol, resulting in the loss of the entire balance of collateral. However, after a liquidation happens, the user is no longer required to repay their debt.

Redemptions

Redemptions enable ORE holders to directly redeem their ORE for collateral from the Troves with the highest LTV in the system. This mechanism ensures that ORE maintains a price close to the redemption parameter.

What are Redemptions?

The redemption mechanism gives ORE holders the ability to redeem ORE for a certain amount of USD-worth of underlying collateral at any time. Note that, redemptions will be available after 7 days of mainnet launch.

Redemptions occur first for the Trove with the highest LTV. It is essential to note that even LTVs at 40% or below may not be considered "safe" against redemptions if you are the user with the highest LTV. To avoid redemptions, a user should maintain a low LTV compared to other participants in the protocol. Alternatively, ORE price needs to trade consistently above the redemption parameter, which decreases the risk of being redeemed against.

When you launch your Trove, you can see through our UI how much ORE needs to be redeemed for your collateral to start being impacted, indicated by the term "Debt ahead."

Is a Redemption the Same as Paying Back My Debt?

No, redemptions are a completely separate mechanism. All a user needs to do to pay back their debt is adjust their Trove's debt and collateral.

As a Borrower, Do I Lose Money if I'm Redeemed Against?

If your Trove is redeemed against, you do not incur a net loss. However, you will lose exposure to the collateral of your choice. Your Trove's LTV will also improve after a redemption, or your Trove will be fully closed.

How Can I Avoid Being Redeemed Against?

The best way to avoid being redeemed against is by maintaining a low LTV relative to the other Troves in the system. A "Debt Ahead" value is displayed when launching a Trove, indicating how much ORE needs to be redeemed before your Trove is affected. Remember: the riskiest Troves (i.e., those with the lowest collateralization) are prioritized during a redemption.

How It Works

Currently, redemptions can only be performed by bots or by directly interacting with our smart contracts.

Initiation: An ORE holder (typically a bot) initiates a redemption by sending ORE to the Earth Protocol smart contract and indicating the amount they wish to redeem.

Execution: The protocol automatically identifies the Troves with the highest LTV collateral ratios (starting from the highest and moving downwards) and redeems the ORE for collateral (based on the oracle price) from these Troves. The collateral is then sent to the redeemer's address with a small fee that is collected by the protocol.

Impact on Troves: The redeemed ORE is burned, and the corresponding amount of collateral is removed from the collateral of the affected Troves. This process continues until the total amount of ORE requested for redemption has been fulfilled.

Stability Mechanism

The redemption mechanism is a crucial stabilizer for ORE. In scenarios where ORE trades below its redemption parameter, users are incentivized to buy ORE at a discount and redeem it for collateral of superior value, thus reducing the ORE supply and helping it trade closer to its redemption parameter. Conversely, when ORE is above the redemption parameter, users are incentivized to launch Troves (borrow ORE) and sell it for profit, increasing ORE supply until the peg is restored.

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Liquidations

What are Liquidations?

To ensure that the entire ORE supply remains fully backed by collateral, Troves that exceed the maximum LTV defined in Troves and Collateral will be closed (liquidated).

The debt of the Trove is canceled and absorbed by the Stability Pool, and its collateral is distributed among Stability Providers.

The owner of the Trove retains the full amount of ORE borrowed and will not need to repay their debt.

System Status affects how liquidations work. Make sure to understand Recovery Mode to avoid unexpected liquidations.

Who Can Liquidate Troves?

Anyone can liquidate a Trove as soon as it exceeds the maximum LTV. The initiator receives gas compensation (200 ORE), plus 0.5% of the Trove's collateral as a reward for this service.