QIP184: Change the Liquidation Process for V2 Vaults

Author: Pablo the Penguin

Background:

The QiDao Protocol currently utilizes a liquidation process where vaults that fall below the minimum collateral to debt ratio (CDR) are liquidated by partially repaying the debt and receiving a bonus in collateral tokens. The current process is a repayment of 50% of the debt and a bonus of 10% of the collateral tokens.

Problem:

The problem is that the current liquidation repayment process leads to disproportionate losses for users in comparison to the amount needed to maintain a loan in good standing, particularly during periods of high volatility. This poses a challenge for maintaining the overall health of the loans while minimizing user loss.

Proposed Solution:

To address the problem of disproportionate user loss during the liquidation process, we propose changing the liquidation repayment amount from 50% + 10% bonus to a minimum of 10% + 10% bonus. The minimum repayment amount would vary by chain and collateral type, and would be defined by the risk committee. The guiding factor for these parameters would be the average size of debt positions, mainly to maintain the attractiveness of liquidating small vaults.

This would decrease the user loss without affecting the overall health of the loans for vaults with high debt amounts, while still ensuring full repayment for vaults with low debt amounts.

This solution aims to balance the needs of both the users and the loan system, by reducing the liquidation repayment amount for high debt vaults while still providing a bonus to incentivize good behavior. Additionally, it could decrease the risk of multiple liquidations during periods of high volatility, improve user retention and increase trust in the loan system

Benefits:

Minimization of user loss: Reducing the liquidation repayment amount from 50% to 10% would significantly decrease the financial loss for users. Maintaining the overall health of the loans: The proposed solution still includes a 10% bonus, which would provide an incentive for users to maintain their loans in good standing.

Balancing the needs of users and the loan system: By reducing the liquidation repayment amount while still providing a bonus, the solution aims to balance the needs of users and the loan system.

Reducing the risk of liquidations during periods of high volatility: With smaller liquidation repayment amount, it would be less likely to trigger multiple liquidations during periods of high volatility.

Improving user retention: With less financial loss, users are more likely to stay on the platform and continue to use the loan service.

Implementation Plan:

Assess the current liquidation repayment process and gather data on the average debt amount of vaults and the proportion of user loss during liquidation. Risk committee to determine the minimum debt threshold, such as 10k on Ethereum, below which the liquidation repayment would be 100% and which the proposed 10% bonus would still apply.

Backtest the proposed variables of reducing the liquidation repayment amount for vaults with debt above the minimum debt threshold. Implement the proposed solution and monitor its effectiveness in decreasing user loss and maintaining the overall health of the loans.

Voting Options

• Approve proposal
• Further discussions needed
• Abstain