xDollar Space (V2) - Defence Mechanism Against System Insolvency
Primer: We’re back with xDollar Space (V2), a multi-chain interest-free lending platform that allows users to borrow $XIM by putting up crypto assets as collateral. This article is going to explore how the system is going to prevent itself from becoming insolvent by employing 2 lines of defence.
Introduction
We’ve talked about xDollar in a previous article below. This one talks about the price peg mechanisms in which the stablecoin $XIM can restore its parity with USD. You can read it here to refresh your memory:
link
In this article, we’re going to explore how xDollar uses 2 lines of defence to protect itself from insolvency
Defence against System Insolvency
xDollar as a platform must never be allowed to become insolvent. If that happens, it will spell trouble for all the users in the protocol. The system will become insolvent when the Total Collateral Ratio (TCR) of the entire system is lower than 100%. This means that the sum of the collateral of all the Troves expressed in USD is lower than the sum of debt of all the Troves expressed in $XIM.
To keep the system robust and protect the solvency of the platform, xDollar uses these two mechanisms:
xPool
Redistribution
xPool (Stability Pool)
Th first line of defence in maintaining system solvency is the xPool, also known as the Stability Pool. Users (called Stability Providers) who transfer their $XIM into the xPool are able to farm for $SPACE tokens. The xPool acts as a source of liquidity to repay debts from liquidated Troves.
When any Trove is liquidated, $XIM from xPool is used to repay the remaining debt. In exchange, the entire collateral of the liquidated Trove is transferred over to the xPool. This means that stability providers will lose a pro-rata share of their $XIM in the xPool to repay the debt but gain a proportionate share of a greater dollar value of the collateral that is transferred over. Since the Troves are liquidated just below 110% in normal circumstances, the likelihood of making a profit is high.
What happens if the xPool runs out of $XIM?
This can happen when there are a lot of liquidations happening. The collaterals that are transferred over to the xPool are not converted back to $XIM and then subsequently deposited back into the xPool. This means that there will be lesser $XIM to liquidated Troves and the system might run into solvency problems again.
This is where the 2nd line of defence is used: Redistribution.
When the TCR of the system falls below 150%, Recovery Mode kicks in. The goal of Recovery Mode is to make sure that borrowers are incentivised to behave in ways that will raise the TCR above 150%. At the same time, $XIM holders are encouraged to replenish the xPool so that it can continue to liquidate Troves that are meant to be liquidated.
The system will do the following:
Block borrower’s transactions that will decrease the TCR
Only transactions that pushed the TCR to be greater or equal to 150% will be executed
The borrowing fee is set to 0%. This will encourage users to put up their collateral to borrow more $XIM within the limitations pointed out in (1) and (2)
When xPool runs out of $XIM for liquidations, the system will redistribute the debt and collateral from liquidated Troves to all other existing Troves. This redistribution is proportional to the recipient Trove’s collateral amount.
What this means is that even though the minimum collateral ratio of Troves is set at 110%, it has a chance to be liquidated in Recovery Mode. The safest way to prevent liquidation for borrowers is to make sure that the collateral ratio of their Troves is always higher than or equal to 150%.
Infographic
We’ve done up a nice infographic to explain the whole defence mechanism.
Where to find out more information?
We hope this article helps to generate some interest in xDollar and understand clearer how xDollar creates incentives to prevent the nightmare scenario of system insolvency from happening. If you’re interested in xDollar and want to find out more, do follow their social media channels here:
Twitter: @xDollarFi
Discord: https://discord.com/invite/c8c7Wm2EEx
All information presented above is for educational purposes only and should not be taken as investment advice. Summaries are prepared by The Reading Ape. While reasonable efforts are made to provide accurate content, any errors in interpreting and summarizing the source material are ours alone. We disclaim any liability associated with the use of our content.