Focused Liquidation Mechanism
Democratisation is paramount in Defi, and the distribution of liquidated assets on most chains fly in the face of this. Kujira 10’s product ORCA 16 is the first dApp on any chain allowing users to bid on liquidated collateral using an intuitive UI, with absolutely no technical know-how required. This resulted in borrowers getting liquidated at lower premiums, and thousands of users able to buy assets on discount. A textbook win-win case study.
A CURRENT EXAMPLE
To put the above into perspective, here are statistics from a liquidation event on Anchor Protocol on the 4th December 2021. These are from ORCA 36.
- Be a killer whale and beat the bots at their own game. Bit on liquidated assets on Terra with ORCA.
- Liquidate assets on Terra at the click of a button. No bots, no code, no problems.
> 1. Go to orca.kujira.app and connect your Terra wallet.
> 2. Choose the amount of UST you would like to bid, and your premium.
> 3. Click the bid button and your bid will be activated.
> 4. When your bid hits, you can automatically withdraw your bLUNA.
- to liquidations on Anchor protocol
> WHAT DOES LIQUIDATION MEAN?
Liquidators ensure that suppliers of funds are not put out of business by losing capital to bad debt, and by keeping lenders solvent, liquidators ensure there’s capital available to would-be borrowers.
When a loan is at-risk, a liquidator may opt to liquidate the loan. They are, in effect, stepping in to pay the difference between the total value of the collateral and the total value of the required minimum percentage of the amount borrowed, in order to keep the system running.
> WHAT LIQUIDATORS GET IN RETURN
Liquidators repay the shortfall on the collateral to the lender on behalf of the borrower.
Remember that the loan is in a stablecoin (UST) and so the value of the collateral is measured in UST. The liquidation is therefore paid in UST.
Once an at-risk loan is successfully liquidated, the lender (in this case, Anchor) gets back the UST they loaned out, and the borrower has the UST they borrowed. The collateral put up by the borrower becomes the property of the liquidator.
> THE BENEFITS OF BEING A LIQUIDATOR
Liquidators are recompensed for their service by means of a premium. This is effectively a discount on the price of the Non-Stable asset used as collateral to secure the loan.
This discount rate on ORCA can vary from 1% to 30%. Bids can be made at any of these premiums.
Market forces mean that liquidators accepting a smaller premium (a lower discount) will be the first to access at-risk collateral. When all the bids placed at lower premiums have been filled, bids at higher premiums will be accessed.
- to bid on Liquidations.
→ The premium is the discount received by the bidder. It starts at 0%, goes up to 30% and the smallest premiums are satisfied first. Assuming there are enough loans to liquidate, all the bids at the lowest premium are utilised before the next highest are activated, moving steadily upward until there is no more collateral to liquidate or no more bids.
> WHAT’S A LOAN?
When an individual wants to borrow UST, they deposit collateral with Anchor in the form of a bonded asset. This is currently either bLUNA or bETH. We go into more detail in this Intro To Liquidations.
The loan in this instance is the UST that Anchor loans to the borrower.
This loan has terms attached to it; if the borrower is unable to meet these terms, the loan is liquidated, and the borrower forfeits the collateral they had bonded.
When this happens, a liquidation occurs.
> WHAT’S A LIQUIDATION?
Anchor loans out UST equal to a maximum of 60% of the collateral bonded. When that ratio tips past 60%, the loan is deemed to be at risk and in danger of liquidation. This happens because the loan is in stable UST, but the collateral (bLUNA, for example) fluctuates in value.
Bottom line, when the value of the borrower’s collateral goes down, their loan could be deemed at-risk.
A third party then steps in to pay up the difference. In Anchor’s case, that third party is ORCA users (ie, You).
> WHAT HAPPENS WHEN A LIQUIDATION OCCURS?
When a loan is liquidated, the lender seeks to recoup the UST they loaned out.
This is the liquidator’s role: they pay up the difference and make the lender whole.
The lender rewards the liquidator for this service by selling them the collateral at a discounted price compared to the going market value. The size of the discount is known as the premium, and on ORCA, you choose a premium from one to thirty percent.
> So, An Example:
Bob has some LUNA. He mints $100 of bLUNA in Anchor and then deposits it. He’s eligible to borrow $60 of UST, which he may use however he likes.
Meanwhile, his buddy Ross has $100 UST, which he bids at 30% on ORCA.
Crypto is a volatile market and some FUD makes LUNA’s value slide. Bob’s $100 of bLUNA is now worth $95, and his loan is at risk.
ORCA leaps into action, and Ross’ bid comes into play. Bob’s loan is liquidated, and Ross receives the bLUNA at the premium he bid on.
The end result stands like this:
→ Anchor (the Lender) gets the $60 back they had loaned out by “selling” the bLUNA Bob bonded.
→ Bob has the $60 he borrowed, but the bLUNA is no longer his*.
→ Ross has $95 worth of bLUNA, which he paid $66.5 for. Ross still has $33.5 left in the ORCA contract should any other at risk liquidations pop up.
> Intorducing ORCA: no longer need to fight a losing battle against bots.
→ How ORCA works.
The liquidated collateral is no longer sold on a fastest-finger-first basis, a system which in the past favoured bots with high liquidity. Assets are now sold from the lowest to highest premium and split evenly between everyone bidding at the same discounted rate.
ORCA allows users to bid at any premium rate and with any amount of UST they have available for upcoming liquidations.
ORCA offers a fire-and-forget strategy; place bids at selected premiums and move on. The dApp does the rest, including re-bidding the returns, should the user choose to.
Most importantly, bots no longer have an edge.