OnVault Stability Mechanism

The OnVault Stability Mechanism is designed to maintain the stability and integrity of the OnVault system. It achieves this by enforcing collateralization requirements, managing liquidations, and ince

Core Components of the Stability Mechanism

1. Collateralization Requirements

   • The system is always over-collateralized. Users must maintain a collateralization ratio (CR) above the minimum threshold to avoid liquidation.

   • Minimum Collateralization Ratio (MCR): 110%

   • Critical Collateralization Ratio (CCR): 125%

2. Vaults and Collateral Management

   • Each user’s collateralized debt position (CDP) is referred to as a Vault.

   • The system calculates the Individual Collateralization Ratio (ICR) for each Vault to monitor its health.

   • A Vault becomes undercollateralized when its ICR falls below the MCR and is subject to liquidation.

3. Liquidation Mechanism Liquidation occurs when a Vault fails to meet the MCR, redistributing its collateral to ensure system stability. The process differs based on the system's total collateralization ratio (TCR):

   • Normal Mode (TCR ≥ 125%)

     • Undercollateralized Vaults are redistributed to active Vaults.

   • Recovery Mode (TCR < 125%)

     • Liquidation conditions are relaxed to encourage collateral top-ups and debt repayments.

     • Vaults with ICR ≥ TCR are left unaffected, while those with ICR < MCR are liquidated and partially offset.

4. Gas Compensation Liquidators receive compensation to cover gas costs and incentivize prompt action. This compensation consists of a fixed amount of 200 USDAO and 0.5% of the collateral from each liquidated Vault.

5. Recovery Mode Recovery Mode ensures the system’s long-term stability by imposing stricter rules on borrowing and incentivizing corrective actions:

   • New USDAO issuance is restricted unless it improves the Vault’s ICR or maintains the TCR above 125%.

   • Recovery Mode acts as a deterrent, guiding the system away from high-risk states.

6. Redistribution of Liquidation Gains

   • Collateral and debt from liquidated Vaults are proportionally redistributed to active Vaults with a collateralization ratio above 110%.

   • Redistribution is designed to preserve Vault ordering by ICR, ensuring system integrity over time.

7. Corrected Stake Mechanism

   • To ensure fair redistribution rewards, a corrected stake mechanism is used.

   • It adjusts a Vault’s stake based on its collateral and system-wide snapshots, preventing new Vaults from gaining an unfair share of rewards.

   The OnVault Stability Mechanism is the backbone of OnVault’s risk management and stability. By enforcing collateralization requirements, managing liquidations efficiently, and incentivizing corrective behaviors, it ensures the system remains stable and reliable under all conditions.