This proposal will outline a mechanism to protect loans from liquidations via an auto-deleveraging mechanic on loans.
As the Solana price dropped over 50% in 10 days, liquidations became, for the first time, a reality to a large number of Hubble users. Since launch, 314 liquidations have occurred on the platform, 244 of which occurred in May. From 2 to 12 May, a total of $1.7M worth of debt was liquidated.
It has been repeatedly suggested/discussed that a liquidation protection mechanism would be a valuable addition to the platform, though the form of this remained undecided.
We propose that the liquidation protection should be in the form of an auto-unwind mechanic on user loans. When a loan reaches the maximum LTV (which will soon be increased from 75% to 80%), a portion of a user’s collateral is sold on the market, converted to USDH, and used to unwind the loan. You could also call this a partial liquidation.
The user pays a “fee”, in the form of their collateral, while their LTV is decreased via a portion of USDH debt being repaid.
At present, we propose that 20% of collateral be sold to unwind if it incurs less than 1% slippage
The SOL price drops from $110 to $100. A user had a debt of 80 USDH, with $110 of SOL deposited. The LTV of the increases from 72.7% to 80%, and the loan can be liquidated.
Via the liquidation protection mechanism, $20 (20%) of SOL is sold, swapped to USDH, and repaid.
After the unwind, the loan stats would be:
Collateral: $80 SOL
Debt: 60 USDH
Partial liquidations happen natively on loans, and there is no requirement other than having a loan and opting into partial liquidations.
Gives you a time buffer to readjust your loan before next liquidation happens
No limit on how many partial liquidations can occur, provided there is enough collateral to fund it
Partial liquidations remain liquidations, so with each liquidations you lose a portion of your collateral
Have to sell a large % of collateral to make a big buffer between next liquidation
It has also been suggested that liquidation protection could happen via the stability pool, whereby a user’s staked USDH can be unstaked and used to repay a portion of debt on the at-risk loan.
Via this mechanic, a user’s Stability Pool (USDH Vault) balance will decrease according to a specified amount, and their USDH debt will be repaid in the exact same amount.
- You do not lose your collateral assets when stability pool protection activates
Only users with USDH deposited in Stability Pool can have access to this feature
Stability Pool can get drained if collateral price keeps dropping; so you can end up without your USDH deposit, and without your collateral.
The parameters and exact implementation of either system is not set in stone, and we welcome any suggestions as to how we could implement liquidation protection in the most effective way possible. The goal is to build a mechanic that provides the best UX, and feedback is of great importance to enable us doing so.