Stability Pool

What is the Stability Pool?

The Stability Pool is the first line of defense in maintaining system solvency within the Earth Protocol. It achieves this by acting as the source of liquidity to repay debt from liquidated Troves — ensuring that the total ORE supply always remains backed.

When any Trove is liquidated, an amount of ORE corresponding to the remaining debt of the Trove is burned from the Stability Pool’s balance to repay its debt. In exchange, the entire collateral from the Trove is transferred to the Stability Pool.

The Stability Pool is funded by users transferring ORE into it (called Stability Providers).

This creates an interesting dynamic: over time, Stability Providers lose a pro-rata share of their ORE deposits while gaining a pro-rata share of the liquidated collateral.

For example, in the case of Bitcoin Troves, since these are likely to be liquidated at just above 90% LTV, it is expected that Stability Providers will receive a greater dollar-value of collateral relative to the debt they pay off.

Why should I deposit ORE to the Stability Pool?

Stability Providers will earn profits from liquidations and may potentially receive EARTH tokens in the future.

Liquidation profits are inversely related to the LTV of the collateral type being liquidated on Earth Protocol. For instance, when a Bitcoin Trove is liquidated, users can anticipate acquiring Bitcoin at approximately a 10% discount.

Similarly, for LST Troves that allow users to borrow ORE at up to 85% LTV, Stability Providers can expect to obtain that LST at roughly a 15% discount upon liquidation.

What are liquidations?

To ensure that the entire ORE supply remains fully backed by collateral, Troves that exceed the maximum LTV 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. However, the user experiences a loss of overall value; thus, it is critical to avoid liquidation by maintaining a ratio above the protocol-set amount.

Who can liquidate Troves?

Anyone can liquidate a Trove as soon as it goes above the maximum LTV defined by the protocol.

The initiator receives gas compensation (200 ORE + 0.5% of the Trove's collateral) as a reward for this service. This mechanism is designed to mitigate excessive exposure of the liquidator to the gas costs incurred during this on-chain operation.

Currently, our UI does not offer the possibility to liquidate Troves. Please check our Contract Addresses if you wish to implement a service for liquidating Troves.

The 200 ORE is funded by a Liquidation Reserve that users deposit into when opening their Trove. The 0.5% portion comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.

How do I benefit as a Stability Provider from liquidations?

As liquidations occur just above a predefined LTV, you will likely experience a net gain whenever a Trove is liquidated as a Stability Provider.

Let’s say there is a total of 1,000,000 ORE in the Stability Pool and your deposit is 100,000 ORE. Now, a Trove with debt of 200,000 ORE and collateral of 400 Bitcoin is liquidated at a Bitcoin price of $40,000, thus resulting in an LTV of ~90% (= (200,000) / (400 * 40,000) * 100%). Given that your pool share is ~10%, your deposit will decrease by 10% of the liquidated debt (20,000 ORE), i.e., from 100,000to 80,000 ORE. In return, you will gain ~10% of the liquidated collateral, i.e., 40 Bitcoin, which is currently worth $1,600,000. Your net gain from the liquidation is $1,580,000.

Liquidation profits are inversely related to the maximum LTV of the collateral type being liquidated on Earth Protocol. For instance, when a Bitcoin Trove is liquidated, users can expect to acquire Bitcoin at approximately a ~10% discount.

Similarly, for LST Troves that allow users to borrow ORE at up to 85% LTV, Stability Providers can expect to obtain that LST at approximately a ~15% discount upon liquidation.

Can I withdraw my deposit whenever I want?

As a general rule, you can withdraw the deposit made to the Stability Pool at any time. There is no minimum lockup duration. However, withdrawals are temporarily suspended whenever there are liquidatable Troves with an LTV above the amount set by the protocol that have not yet been liquidated.

Can I lose money by depositing funds into the Stability Pool?

While liquidations typically occur at an LTV well below 100%, it is theoretically possible for a Trove to be liquidated above 100% in a flash crash or due to an oracle failure. In such cases, you may experience a loss since the collateral gain will be smaller than the reduction in your deposit.

If ORE is trading above $1, liquidations may become unprofitable for Stability Providers even at an LTV lower than 100%.

Please note that although the system is diligently audited, a hack or a bug that results in losses for users can never be fully excluded.

What happens if the Stability Pool is empty when liquidations occur?

If the Stability Pool is empty, the system utilizes a secondary liquidation mechanism called redistribution. In such cases, the system redistributes the debt and collateral from liquidated Troves to all other existing Troves. The redistribution of debt and collateral is performed in proportion to the recipient Trove's collateral amount.