Hey, as we expand our cross-chain loans, we’re also exploring ways to improve our liquidation process to make it safer for the DAO and less damaging to users. Currently, our loans use a “hard liquidation” approach:
- If a user’s collateral-to-debt ratio exceeds 85%, their entire collateral can be liquidated.
- Once this threshold is crossed, anyone can trigger liquidation. All the user’s debt is added to the bad debt, and their collateral is taken. The liquidator gets a portion of this collateral.
- People can then redeem this bad debt and receive collateral at a discounted rate.s cleared, any remaining collateral goes to the reserve.
Current fees:
- Liquidation rewards: 0.67% of the collateral.
- Redemption fee: 10%.
- Reserve takes all remaining collateral
We’re considering moving to a “soft liquidation” approach:
- If a user’s collateral-to-debt ratio exceeds 85%, anyone can trigger liquidation.
- In this case, bnUSD is redeemed for the user’s collateral at a discount, plus a DAO fee.
- Liquidation stops if the user’s position improves back below the 85% threshold.
- If the debt is below a minimum threshold, the entire position can be liquidated to prevent small positions.
Proposed fees:
- Liquidator fee: 4%
- DAO fund fee: 1%
We need to handle this change carefully to allow bots to adjust, so we don’t end up with bad positions during the transition. In the old model, the reserve had a role in case we were late to liquidate and ended up with more bad debt than collateral. As a last resort, people could use the reserve funds to repay the bad debt, although this was never a great solution and, in practice, never actually happened. In the new approach, the idea is to simply accumulate any bad debt that arises. If we do get bad debt, it can be repaid without any reward. This means the DAO would need to vote on whether to repay any bad debt with the daofunds if it ever occurs.
