LP Collateral & Liquidation

LP Collateral

Liquidity Providers (LPs) are required to post collateral when they commit liquidity to the pool. This collateral acts as a risk buffer and is used to ensure that LPs can fulfill their rebalancing responsibilities.

• Purpose: LP collateral ensures the protocol can continue functioning even if LPs fail to rebalance their positions. In such cases, the collateral is used to settle the LP's obligations to users.

• Required Collateral: The amount of required collateral is determined by the pool's strategy contract and is initially enforced during addLiquidity.

• Health Check: Collateral health is continuously monitored via getLPLiquidityHealth. LPs must keep their collateral ratio above the minimum healthy threshold.

• Adding Collateral: LPs may add additional collateral at any time using addCollateral. If the LP was flagged for liquidation and the added collateral brings them back to a healthy state, the liquidation is automatically cancelled.

• Withdrawing Collateral: LPs can reduce their collateral using reduceCollateral, but only if it doesn't breach the required threshold.

LP Liquidation

If an LP becomes under-collateralized, the protocol allows partial liquidation of their position to protect users and system solvency.

When Can LP Liquidation Happen?

• LP's collateral health falls below the critical threshold.

• Liquidation amount is within protocol-specified limits and does not exceed 75% of available liquidity.

• LP must not have any pending requests.

• The protocol must be in an active cycle.

Liquidation Process

1. Trigger: Any third party may call liquidateLP on an under-collateralized LP.

2. Validation: The protocol checks collateral health, ongoing requests, and allowable liquidation limits.

3. Request:

   • A liquidation request is recorded for the LP.

   • The initiating liquidator's address is stored.

4. Settlement:

   • If liquidation proceeds post-cycle, LP's liquidity commitment is reduced.

   • A portion of their collateral is transferred to the liquidator as a reward.

   • If LP is left with no remaining liquidity, they are fully removed.

Cancellation

If the LP adds enough collateral before the next rebalancing and their position returns to a healthy state, the liquidation is cancelled and the request is cleared.

Note: LPs who are liquidated lose part of their committed collateral as a liquidation penalty. Maintaining adequate collateral ensures continued participation in the protocol.