Arkadiko Liquidation Pool
Loyal followers already knew this upgrade was coming! We have been excited about it for quite some time as its a major improvement on multiple fronts.
In this post we dive into the details of the Arkadiko Liquidation Pool, a piece of liquidation infrastructure that improves the Arkadiko protocol by ensuring plenty of stand-by liquidity to purchase Vault collateral when needed.
What is the context of this upgrade ?
As a refresher, Arkadiko is a decentralized liquidity protocol, allowing users to mint USDA, the Arkadiko stablecoin. In order to mint USDA, a user locks collateral in an Arkadiko Vault. We support STX, which can keep earning its yield through PoX, and xBTC.
Arkadiko Vaults enable on-chain users to create extra liquidity through USDA. It does come with some responsibility in that users need to carefully keep an eye on their Vault health. The ratio between collateral value locked in the Vault and the outstanding debt taken on by minting USDA needs to be kept in check, ensuring that USDA is always backed by more assets in Vaults. If prices of collateral decline significantly, resulting in an unhealthy ratio between value and debt, a liquidation mechanism needs to be activated which pays back the debt. As a reward for paying back the debt, the liquidator is given the collateral in the Vault at a discount of 10%. This makes Vault liquidations quite attractive as you purchase crypto-assets at a discount to fair market value.
Now typically, capitalizing on these types of opportunities is reserved for sophisticated players that watch smart contracts and react automatically to Vault tagged for liquidation. Without running scripts and having funds stand-by to move, you will be too slow.
In comes the Arkadiko Liquidation Pool !
We’ve created a solution where everyone, without running specialized software, is able to participate in Vault liquidations. We do this by creating a pool of capital, in this case USDA, and running our own scripts to direct that USDA towards liquidations when they need to happen.
Arkadiko runs these scripts to help support the mechanism but by no means is this a requirement. Anyone can call a function on the smart contract to trigger the liquidation pool in liquidating Vaults. This means that the liquidation pool works completely decentralized. We just run the scripts as a courtesy towards the community.
We can also only move the USDA for collateral purchases and not for withdrawals to any wallet. So it’s a decentralized and non-custodial solution, in the spirit of Arkadiko.
This pool will work similar to most DeFi pooling mechanisms, where contributions and profits are split pro-rata your pool share. Do be aware that the USDA is used in liquidations, so it is effectively exchanged for discounted assets. When that happens, part of your USDA will turn into xSTX/STX/xBTC. You can then withdraw those tokens, sell them and add the USDA back into the liquidation pool or just enjoy the arbitrage profits.
This approach has several advantages and benefits for Arkadiko:
- A pool of capital purposed for liquidations, improving the stability and robustness of USDA in market downturn scenario’s.
- A single staking use case for USDA with economic fundamentals backing it (liquidation discount)
- Because of improved stability thanks to 1), we can increase loan-to-value for Vaults, creating more liquidity and extra efficiency.
On top of this, we will be sending DIKO emissions towards this pool ! As per a recent governance vote, 8.2% of total emissions will be sent there. Doing the math on how much APY this will be is certain to hold some alpha for the early birds that decide to join this pool.
There will be a lock-up mechanism for the USDA committed. It is not ideal to have the pool fluctuate a lot in how much value is stand-by, we much prefer a stable amount of value being present there. Initial lock-up on USDA deposits is 30 days (4320 blocks). Lockups resets every time you deposit, be aware of this when compounding/redepositing! Epoch period is 5 days and DIKO rewards are distributed at the end of each epoch, pro-rata the USDA at the beginning of the epoch. This means, the first DIKO rewards will be distributed 7 days after opening deposits for the pool.
That’s all there is to know about the liquidation pool, it really is that simple !
The governance vote locking in this new functionality is running, please go ahead and vote here.
Hope to see you liquidating together with us.
To the liquidation pool and beyond !