Part 3: Wing’s Liquidation Bonus Standardization Model
The third article in Wing’s Risk Model Series outlines Wing’s Liquidation Bonus Standardization Model.
If you missed the previous articles in this series, you can read the Introduction, Part 1 and Part 2, here.
Wing has always adhered to a completely decentralized liquidation mechanism since its launch in September, 2020. All users can freely compete and participate in liquidating assets over the borrow limit, so liquidations are almost always carried out instantly. Because of this, there has yet to be any insurance reimbursements caused by delayed liquidations. A properly designed liquidation mechanism reduces the likelihood of needing to pay out reimbursements from the insurance pool, thereby saving users’ funds staking in the insurance pool from needing to be utilized.
When a liquidation occurs, a liquidator may repay some or all of an outstanding loan on behalf of a borrower and in return receive a discounted amount of collateral held by the borrower. This discount is defined as the Liquidation Bonus.
The Liquidation Bonus amount impacts users’ willingness to participate in liquidation, as well the benefits/losses of the liquidator/borrower. A reasonable setting of the Liquidation Bonus ensures the stability of the liquidation mechanism, thereby ensuring the sustainable growth of the Wing project.
If the Liquidation Bonus is too low, it will disincentivize users from participating in liquidation. Without a timely liquidation, the borrowed assets’ value may continue to rise. If the collateral assets cannot cover the borrowed assets, an insurance claim will be initiated, and the compensation will be paid out from user funds staked in the insurance pool. This could be perceived negatively by users and hinder the growth of the project.
If the Liquidation Bonus is too high, borrowers will lose more collateral assets when their positions are liquidated. Because of the fear of capital loss, borrowers will borrow less to avoid liquidation. The Wing reserves depend on the interest paid by borrowers. Less borrowing leads to fewer reserves for buybacks, which negatively impacts WING holders and the project.
In general, the Liquidation Bonus for assets with high popularity, good market liquidity, and low price fluctuations should be relatively low. These assets are easy to swap, and the market circulation is sufficient. A low Liquidation Bonus is enough to stimulate users to participate in the liquidation. A lower Liquidation Bonus can encourage users to participate in the borrowing of an asset. The Liquidation Bonus for less popular assets, poor market liquidity, and large price fluctuations should be relatively high. These assets are not as easy to obtain in the market without slippage. Increasing the Liquidation Bonus for these assets can incentivize users to participate in liquidation.
Based on the above discussion, we have established a Liquidation Bonus Standardized Model. This model relates to Wing’s Asset Risk Model, focusing on the trading volume and fluctuations of relevant assets in the market.
Based on the application of the Liquidation Bonus Standardization Model, the Liquidation Bonus of each asset should be set as follows:
In a follow-up, we will also discuss, propose, and vote with the community to decide whether to adjust the Liquidation Bonus of each asset.
