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Liquidation Mechanism​

       

The Liquidation Mechanism is a fundamental aspect of Chiss Protocol, designed to protect the solvency of the protocol and maintain the stability of the entire ecosystem. When a user's collateral falls below the required collateralization ratio, the liquidation mechanism is triggered to mitigate risk and ensure that the protocol remains solvent.

  • Triggering Liquidations: The liquidation process is triggered when a borrower's collateral value falls below the required collateralization threshold due to market volatility. The Price Manager component, which uses real-time price feeds from ChainLink and Integrated Market Oracles (IMO), continuously monitors the value of collateral and debt. If the collateral value drops to a level where it no longer sufficiently backs the borrowed amount, a liquidation is initiated to protect the protocol.

  • Liquidation Process: During a liquidation, the borrower's collateral is seized and used to cover the outstanding debt. The Stability Pool is the first line of defense in this process. The Stability Pool provides the necessary funds to repay the debt, and in return, the collateral is distributed among the Stability Providers based on their contribution to the pool. This ensures that the protocol remains solvent and that the debt is covered without causing a negative impact on the overall system.

  • Cross-Pool Liquidations: Given the multi-pool and cross-asset nature of Chiss Protocol, liquidations can involve collateral and debt from different pools. The liquidation mechanism is designed to handle these complexities, ensuring that the liquidation process is fair and efficient across different asset types. The Stabilization Algorithm also plays a role in maintaining balance across pools during liquidations, helping to prevent disruptions in liquidity and asset pricing.

  • Benefits of the Liquidation Mechanism: The liquidation mechanism is crucial for maintaining user confidence and the overall health of the protocol. By ensuring that undercollateralized positions are quickly resolved, Chiss Protocol minimizes the risk of cascading failures that could lead to broader instability. Additionally, the liquidation mechanism incentivizes users to maintain adequate collateral levels, promoting responsible borrowing and lending within the ecosystem.

The Liquidation Mechanism in Chiss Protocol is a key safeguard that ensures the protocol remains solvent, stable, and resilient in the face of market volatility. By leveraging the Stability Pool, real-time price feeds, and cross-pool capabilities, the liquidation process is designed to be efficient, transparent, and effective in maintaining the health of the protocol.