Advancing Stablecoins Part 2: iUSD’s Efficient Liquidation System Ensuring Stability in the Face of Market Volatility
How iUSD’s liquidation process, Stability Pools, and oracles contribute to its resilience
In the first part of this series, we discussed iUSD’s triple-peg mechanism, which ensures its stability even during market turbulence. In this second part, we will delve into the efficient liquidation system of iUSD, exploring the roles of Stability Pools and oracles in maintaining the overall stability of the protocol.
Efficient Liquidation System: Stability Pools and Oracles
Another contributing factor to iUSD’s price stability is Indigo’s efficient liquidation system through Stability Pools and the use of oracles. This liquidation process is designed to ensure the ADA collateral backing iUSD remains above a specific threshold, known as the Minimum Collateralization Ratio, or MCR for short.
Role of Oracles
Oracles play a crucial role in the liquidation process by providing accurate and up-to-date price information for the collateral (ADA) and the stablecoin (iUSD). Indigo Protocol utilizes reliable and secure oracles to fetch market data, ensuring that the protocol always operates with the most current and accurate price information. This constant price monitoring allows the protocol to initiate the liquidation process when needed, maintaining the integrity of iUSD’s peg.
When a Collateralized Debt Position (CDP) becomes undercollateralized (falls below the 120% Minimum Collateralization Ratio), the liquidation process is triggered. Stability Providers in the iUSD Stability Pool, who have deposited iUSD, automatically liquidate the undercollateralized CDP using their deposited iUSD. In return, they receive the ADA collateral from the liquidated CDP, while the liquidated user retains their iUSD but loses their ADA collateral. This process helps maintain the collateralization ratio and ensures that the mint price of iUSD in Indigo remains accurate to the oracle, further enhancing its stability.
Comparison to Other DeFi Platforms: The liquidation system in Indigo Protocol differs from other DeFi platforms in several ways:
- Stability Pools
Indigo Protocol employs Stability Pools, where users can deposit iUSD to participate in the liquidation process. This approach encourages active participation from the community and provides an additional layer of stability to the protocol while utilizing $INDY rewards as an incentive to equalize stability pool saturation.
- Efficient and fair liquidation
Indigo’s liquidation process is designed to be efficient, reducing the likelihood of cascading liquidations that can occur on other DeFi platforms. By using Stability Pools and a reliable oracle system, Indigo ensures that liquidations are handled swiftly and fairly, minimizing the impact on users and the overall protocol.
iUSD’s liquidation system, which leverages Stability Pools and oracles, is instrumental in maintaining its stability during times of market volatility. By ensuring that the collateral backing iUSD remains above a specific threshold, the protocol is able to maintain the integrity of iUSD’s peg, making it a secure and reliable stablecoin solution. In the next and final part of this three-week series, we will cover the methods available for acquiring iUSD, real-world use cases, and the benefits of CDP Liquid Staking.