Liquidation

Liquidation occurs when a leveraged position meets at least one of the following conditions:

1. The position is underwater

2. The position remains opened after its maturity

Liquidators can close a liquidatable position by fully repaying the position’s debt and acquiring the remaining assets at a discounted rate, denominated in USDC units (based on the Oracle Price).

The position is underwater

Debt ratio is a parameter that will help users see how “healthy” or how close the position is to its liquidation point. Stella employs a concept of collateral and borrower credit to calculate debt ratios.

$$\text{DebtRatio} = \frac{\text{TotalBorrowCredit}}{\text{TotalCollateralCredit}}$$

If a position in Stella Strategy has a Debt Ratio of over 100%, it means that the collateral value may not cover the debt (i.e. the borrowed amount) value, implying inability to repay debt. As a result, that position will become liquidatable.

Collateral Credit

A Collateral Credit determines how much credit is gained from collateralizing an asset. The collateral credit is derived from the collateral factor which depends on the volatility of an asset. The higher volatility of an asset, the lower the collateral factor.

$$\begin{align*} \text{TotalCollCredit} =& \text{ LPValue} \cdot \text{LPCollFactor} \\ &+ \sum \text{ExtraCollTokenValue} \cdot \text{ExtraCollTokenCollFactor} \end{align*}$$

Stella uses the concept of LP token as collateral to enable undercollateralized loans. Thus, the LP collateral credit comes from the minimum collateral credit within the asset pair.

For example, $1 worth of ETH has 0.8 collateral credit while $1 worth of DAI has 0.95 collateral credit as ETH is considered a higher-volatile asset. Moreover, when performing leveraged yield farming on the ETH-DAI asset pair, 0.8 (the lower of 2 values) will be used as collateral factor.

pageCollateral Factor

Borrow Credit

A Borrow Credit determines how much credit is consumed from borrowing an asset. The borrow credit is derived from the borrow factor which depends on the volatility of an asset. The higher volatility of an asset, the higher the borrow factor.

$$\text{BorrowCredit} = \text{TotalDebtValue} \cdot \text{BorrowFactor}$$

$$\text{TotalBorrowCredit} = \sum_i \text{BorrowCredit}_{\text{BorrowedAsset}_\text{i}}$$

For example, $1 worth of ETH has 1.4 borrow credit while $1 worth of DAI has 1.05 collateral credit as ETH is considered a higher-volatile asset.

pageBorrow Factor

The position remains opened after the maturity

To ensure Stella’s ecosystem sustainability, lenders need to be rewarded for allowing their funds to be liquidity sources within a reasonable timeframe. Every position on Stella Strategy will mature and expire after 30 days since the time of opening.

After expiration, the position will become liquidatable regardless of the current debt ratio, and its yields will be realized by the system and distributes to the lenders if the yield is positive. The percentage cut model will be applied to make sure that lenders will be able to get some lending yields.

Stella encourages leveragoors to monitor their leverage positions closely and always be aware of their current PnL and the time until maturity to avoid any undesirable circumstances.