Collateralization and Liquidation

The Unstable Protocol uses overcollateralization to ensure the stability of nUSD. This page explains how collateralization works and what happens during liquidation.

Collateralization

Every nUSD in circulation is backed by more than $1 worth of collateral. The protocol requires users to maintain a minimum collateralization ratio for their positions. This ratio varies by collateral type but is typically at least 125%.

Supported Collateral Types

Unstable accepts multiple types of high-quality collateral across different asset classes:

  • stS

  • scETH

  • scUSD

  • wstkscUSD: Wrapped staked scUSD

  • [REDACTED]

  • [REDACTED]

Monitoring Your Collateral Health

Your position's health is determined by the ratio between your collateral's value and your debt. To calculate this:

Collateralization Ratio = (Collateral Value) / (nUSD Debt)

You can monitor your collateral health on the Unstable Protocol dashboard. It's important to maintain a healthy buffer above the minimum required ratio to protect against market volatility.

Liquidation

Liquidation is the mechanism that ensures the protocol remains solvent even when collateral values drop.

When Liquidation Happens

If a vault's collateral falls below the safe threshold (e.g., 125%), it becomes eligible for liquidation. This can happen due to:

  1. A decrease in the market value of your collateral

  2. A depeg of the collateral asset (for stablecoin collaterals)

The Liquidation Process

When liquidation occurs:

  1. The system detects that a position has fallen below the minimum collateralization ratio

  2. The Stability Pool provides nUSD to cover the debt

  3. The liquidated collateral (minus a penalty) is distributed to Stability Pool depositors

  4. The user's debt is cleared, and any remaining collateral is returned to the user

Liquidation Penalty

A liquidation fee is applied when positions fall below the minimum collateralization ratio. The exact fee varies by collateral type.

How to Avoid Liquidation

To prevent liquidation:

  1. Monitor your position regularly

  2. Add more collateral when your ratio approaches the minimum threshold

  3. Partially repay your debt to improve your collateralization ratio

  4. Maintain a healthy buffer above the minimum required ratio

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