🚨Liquidations

How Indigo liquidates undercollateralized loans: the freeze and liquidate steps, how Stability Pool depositors are paid out, and the fees involved.

Overview 🌐

Understanding Liquidations

Liquidations occur when Collateralized Debt Positions (CDPs) become undercollateralized. This process ensures the stability and solvency of the protocol.

In Indigo Protocol V3, liquidations apply to CDPs backed by any whitelisted collateral type (ADA or CNT). Payouts to Stability Pool depositors are made in the collateral asset of the liquidated CDP.

Liquidation Process ⚙️

Two-Step Procedure: Liquidations in the Indigo Protocol are automated by bots but the actual two-step process is as follows.

• Freeze the CDP: Once frozen, the CDP is inaccessible to its former owner, who forfeits all access and rights to it.

• Liquidate the CDP: The CDP's debt is settled by burning iAssets from a Stability Pool, and its collateral is proportionally distributed to Stability Pool stakers in the collateral asset type backing the loan.

Incentive to Liquidate 📈

Stability Pool stakers are motivated to participate in Stability Pools as they can earn a share of the CDP's collateral. Typically, the value of the earned collateral may exceed the value of the canceled debt, especially when a liquidated CDP has a collateral value above 100% of the iAsset value.

Fees 💸

• Liquidation Processing Fee: A percentage of the collateral that would be paid to the Stability Pool is taken and paid to the Treasury. The fee is capped to prevent Stability Pool providers from incurring a net loss (except for ADA network fees).

• Interest settlement: Upon liquidation, interest is minted into the interest collection script, increasing its principal. The Stability Pool then burns principal debt.