To keep the PAYD stablecoin well collateralized by ETH, whenever the ETH price drops, risky caches have the potential to be liquidated.
Where Individual Reserve Ratio (IRR) ≤ 115%
Risky Caches with Individual Reserve Ratio (IRR) that falls below the Minimum Reserve Ratio (MRR) of 115% will be liquidated by the system. If more than one Cache meets the liquidation criteria, the sequence of liquidation will be from the riskiest to the least risky.
Condition: If Liquidated Caches' PAYD ≤ PAYD In Rewards Pool
Liquidated Caches will be closed. ETH staked (minus liquidation fee) is distributed proportionally to the Rewards Pool users based on the amount of PAYD staked. The total PAYD issued of the liquidated caches will be taken proportionally from the Rewards Pool staked PAYD and burnt. For the liquidated user, the PAYD drawn down from the Cache will not need to be returned as their cache is already closed.
Cache #4 is to be liquidated. After Liquidation, Cache #4 will be closed and have 0 ETH and 0 PAYD issued.
Assumptions: Caches #1 through #5 users are also Rewards Pool users. There can be rewards pool users who have not opened a cache.
Value of Caches and Rewards Pool staking before liquidation
During the liquidation, 4 ETH (minus 0.5% liquidation fee) is distributed amongst all reward pool users and 9,245 PAYD burnt proportionally.
Value of Caches and Rewards Pool Staked PAYD after liquidation
The sum of all the Cache’s ETH staked over the total Cache PAYD Debt issued is the Total Reserve Ratio (TRR). Liquidation of risky Caches helps to keep the system’s Total Reserve Ratio (TRR) healthy. After the liquidation event, the system’s Total Reserve Ratio (TRR) rose from 165.86% to 185.67%.
Condition: If Liquidated Caches' Total Issued PAYD > PAYD In Rewards Pool
As specified above, PAYD staked in the rewards pool will be burnt upon each liquidation. Over time, the amount of PAYD in the rewards pool will be depleted if rewards pool users do not stake more PAYD after liquidations.
In the situation where the PAYD in rewards pool is not enough to cover the liquidated cache total issued PAYD, the remaining cache users will automatically be issued PAYD and have that PAYD immediately burnt to offset the liquidated PAYD balance. Upon this burning, the ETH from the liquidated caches (minus the liquidation fee) will be distributed proportionally to the rewards pool users and remaining cache users per PAYD burnt.
For cache users, the value of their cache position should not change, but their IRR will decrease. This set of actions is called redistribution.
The rewards pool only has 6,000 staked PAYD, insufficient to offset the liquidated cache #4 PAYD issued of 9,245.
9,245 - 6,000 = 3,245 PAYD
The outstanding 3,245 PAYD is then added onto healthy caches #1, #2, #3 and #5 by proportionally issuing more PAYD and immediately burning it. In return for taking on the extra PAYD issued of 3,245 (but not receiving it in their wallet), healthy caches are rewarded by receiving a proportion of the liquidated cache #4 ETH collateral.
ETH to be distributed to:
Rewards Pool: (6000/9245) * (4 ETH - (4 ETH * 0.5%)) = 2.58301785 ETH
Healthy Caches: (3245/9245) * (4 ETH - (4 ETH * 0.5%)) = 1.39698215 ETH
Healthy caches sees an increase in ETH as well as higher PAYD issued. The total of 1.396982 ETH is distributed to healthy caches.
Rewards Pool users receive a total of 2.583018 ETH.
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