Dear Anchor community,
We’re pleased to present the new liquidation queue mechanism for Anchor, which has successfully completed its audit and produces multiple benefits for Anchor.
Anchor’s liquidation mechanism is deployed to sell undercollateralized borrower positions on the protocol where the LTV of a user’s outstanding debt position passes a certain threshold, and their collateral (e.g., bLUNA, bETH) is sold off to prevent borrower default and maintain parity of the larger money market’s solvency. The liquidation contract converts collateral of at-risk positions below a certain threshold into Terra stablecoins (e.g., UST), which are used to repay the loan.
For example, if Alice has a position of 100 bLUNA used as collateral at an LTV of 50% where the bLUNA price is $50, she can borrow up to 2500 UST. Should the price of bLUNA drop to ~$35, Alice’s position pushes into an LTV of 60%, triggering partial or full liquidation of her 100 bLUNA collateral – sold off for UST and used to repay the loan.
At-risk borrow positions are liquidated by bidders, who submit bids to the liquidation contract to win the borrower’s collateral at a discount.
The current liquidation mechanism on Anchor functions on a first-come-first-serve basis. Although bidders can set a premium rate (i.e., the signaled discount exchange for UST for the at-risk collateral in the liquidation contract), it does not currently affect the order of bids being executed.
The consequence is that liquidations are primarily based on the speed of bid execution rather than what the bidder’s premium rate is – precluding many users from participating in liquidations. With the new liquidation queue, liquidations will not be prioritized by speed and rather will be prioritized based on the premium rate.
The lower the premium rate, the higher the chance a bidder’s submission to the liquidation contract will be executed.
For some context, the premium rate is the discount bid for the at-risk collateral to be liquidated. For example, if Bob submits a liquidation bid at a premium rate of 10%, he’s signaling a willingness to exchange UST for Alice’s 100 bLUNA at a 10% discount. Previously, the size of the premium bid was irrelevant to whether Bob won the execution and could exchange his bid UST for Alice’s bLUNA.
With the liquidation queue, since bid orders are a function of the premium rate, it will encourage liquidators to reduce the premium rate for their bids in a more competitive market for liquidations.
We expect the delivery of this new mechanism to create an equilibrium premium rate that will benefit both the borrowers and liquidators.
The Effects for the Average User
The new liquidation unlocks a new door for the average user to participate in liquidations in a more egalitarian manner. Previously, only bots were able to execute bids competitively due to the fierce speed race for capturing at-risk collateral. With the liquidation queue, all participants can have a fair opportunity for bidding on liquidations.
All that users need to do to become bidders in the liquidation queue is to submit their bids with a corresponding premium rate. Bidders wait for the waiting_period to pass (~10 mins) and activate their bids, making the bids eligible for liquidations when they occur.
The liquidation queue subsequently awards bidders with liquidations in an order-book style format, with lower premiums higher up the book ladder and more likely to capture at-risk collateral (e.g., bLUNA). Speed of bid submission is swapped for strategic placement of liquidations bids and their corresponding premium rates.
Need for Current Bidders of The Liquidation Contract to Move Bids
Current liquidation contract bidders on Anchor that have placed bids on previous contracts should retract bids and move them to new liquidation contracts at the new mainnet liquidation contract address, which will be released publicly should this proposal pass.
Not retracting their bids will make their bids useless should the governance proposal pass to use the new liquidation queue. Bidders will be able to place bids before the governance proposal is executed, and once the proposal is executed, the bids will go live.
Notably, Kujira, a third-party team we’ve been collaborating with, has released a front-end for the new liquidation queue will offer regular Anchor users an intuitive interface to participate in the new bid process. You can find the interface from the Kujira team in the link below:
NOTE – A 1% fee is charged when withdrawing liquidated collaterals through their Web App.
We want to encourage more open collaboration, discourse, and engagement on Anchor’s governance. The liquidation queue is the latest opportunity to discuss relevant items pertaining to Anchor and its community governance. Please allow for open discussion in the comments below.
A formal governance proposal for Anchor’s migration to the new liquidation queue will be initiated at 10/26 11 AM UTC (8:00 PM KST)