QiDao Introduces Partial Liquidations

TL;DR: Risky vaults will now be partially liquidated and then returned to the original owner.

Why are we making liquidation changes?

  • Lower the amount of collateral vault owners would lose during liquidation scenarios
  • Increase user capital efficiency

DeFi is for everyone. Polygon has opened DeFi to many users that have been historically priced out due to high gas fees. We want to make our Protocol as inviting as possible to these users, regardless of their wealth or knowledge of DeFi. We do this by making our Protocol a safe place for people to interact and learn about DeFi. That said, liquidations are an important mechanism of a healthy protocol and we still have sufficient measures in place to guarantee the protocol’s integrity.

What is the collateral to debt ratio?

The collateral to debt ratio represents the relationship between the value of locked collateral in a vault and the debt that the vault has outstanding. In order to ensure that all miTokens are always backed by collateral value, vault owners must maintain a minimum collateral to debt ratio. This minimum collateral to debt ratio is referred to as the Liquidation Ratio, because vaults that fall below this threshold are liquidated.

What are liquidations?

Any vault whose collateral to debt ratio falls below the Liquidation Ratio (150%) can be liquidated. The Protocol makes that determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a vault. Each vault type will have its own Liquidation Ratio, based on the risk profile of the particular collateral asset type. This is to ensure there is always sufficient collateral in the vaults to cover all outstanding debts.

How will liquidations take place?

When vaults fall below the 150% liquidation ratio, liquidators repay 50% of the vault’s debt and withdraw a portion of the locked collateral tokens as compensation. The vault will then be returned to the original vault owner at a healthy collateral to debt ratio. To liquidate a vault, users have to identify a risky vault and click buy risky vault. This will automatically carry out the liquidation process if the liquidator has enough miTokens. Liquidators must have enough miTokens to carry out liquidations

Liquidators can expect around 12–20% gains from liquidating risky vaults.

Partial liquidation process

What is the penalty for being liquidated?

Currently, risky vaults are fully liquidated, meaning that their original owners lose all of the locked collateral, and keep their miTokens, resulting in a loss of around 30% for the original owner. With partial liquidations, vault owners only lose some of their collateral as penalty for having risky vaults. Vault owners earn the miTokens that are repaid by liquidators, since the debt becomes an asset. They then lose part of their collateral tokens. As a result, owner’s of risky vaults will incur a ~7% penalty. This considerably reduces the loss from liquidation (previously ~30%).

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