To date, for CSDT, we have been using the terminology of “liquidation”. The reason for this terminology was because of there being a “liquidation price”. But let’s look in detail how this process works and triggers.
Let’s say you create a CSDT with 150% collateral of FTM and at a price of $0.0121. Your total collateral is $181 (15,000 FTM). You withdraw $100. Your “liquidation” price is $0.01.
So what happens when the price of 1 FTM decreases to $0.01. Your CSDT position becomes eligible for “liquidation”. The system takes a minimum amount of collateral, configured via the “liquidation” module. The minimum for FTM is currently configured as 10,000 FTM. This 10,000 FTM is removed from your collateral and auctioned off to the highest bidder. So let’s assume we get market value for it, so we receive; 10,000 * 0.01 (current price that triggered your “liquidation”). So we received $100. This $100 pays off the debt of the CSDT ($100), and the CSDT now has a balance of 5,000 FTM (15,000 FTM original-10,000 FTM (auctioned)), and a debt of $0. Your holdings are, 5,000 FTM and $100. The candidate that won the auction has 10,000 FTM and -$100.
Now let’s assume we did not get the market price of 0.01, and only received $90, in this case, debt is decreased by $90, leaving $10. So the CSDT has collateral 5,000 FTM (worth $50), and your debt is $10. Giving you a collateral ratio of 303%.
So while reviewing this process, and after valuable feedback from community members and admins, it was pointed out that this isn’t true liquidation, but instead a rebalancing event. As the portfolio is simply rebalanced to maintain it’s weighted average (similar to index funds)
What Is Rebalancing?
Excerpt from https://www.investopedia.com/terms/r/rebalancing.asp
Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.
For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50.
TLDR: We will be changing the terminology of liquidation to rebalancing.