Minimum acceptable Liquidation Contract

[rowgraus]

What is the Problem Being Solved?

Our existing liquidation contract sells vaults on the AMM one at a time until liquidations are complete. However, there is no protection against large vaults (relative to AMM pool size) coming up for liquidation, such as the $65m vault that was liquidated on Maker several weeks ago. A sale of a large vault relative to the collateral in the liquidity pool would cause a large price impact and lead to significant losses for the RUN Protocol.

For reference, the price impact of a trade on an X*Y=K curve is 2x the size of the trade relative to the size of the pool. For example, a $10m trade on a pool with $50m in liquidity would lead to a drop in price received for the trader of 40% (2 x 20%).

This ticket is to create a new liquidation contract which implements controls on the sale to minimize price impacts.

Description of the Design

Specific elements include:

1. Creating and defining a "cohort" of liquidated vaults, which share in leftover change after liquidation of the full cohort is complete
2. Splitting individual sales on the AMM based on X% of the total AMM pool size (specific % a governance-controllable parameter. 0.05% reasonable)
3. Delay sale actions by a controllable parameter (gov. controllable parameter. 10 seconds reasonable)
4. Stop sale activity if AMM price diverges from Oracle price by > then X% (gov. controllable parameter. 5% reasonable)

Raw notes from previous discussion:

• Aggregation of liquidated vaults (liq contract has internal seat to sell from with loop until it is empty)
• Rate limiting of liquidation:
  -- Limit size of sales to limit price impact to a threshold (0.1% of pool size - controllable by governance)
  -- We expect Liquidator to pay gas fees out of execution fees it got from everyone else
  -- Delay between sale actions by controllable parameter (10 seconds)
• Limit of oracle vs. AMM price - stop selling if price diverges by X% controllable by governance
• Cohort model to return assets
  -- Message to liquidation engine that says “ok I’m done now”
  -- Cohort model to be defined as we go

Security Considerations

Test Plan

• sell an amount smaller than the tranche size
• sell an amount exactly equal to the tranche size
• sell larger than tranche size
• oracle diverges from amm price and so pause liquidation

ref: #3533

[Tartuffo]

@turadg For Restival, create a new ticket to clean up liquidation selection in Vault Manager.

[dckc]

The problem statement isn't clear to me. Why should we protect against "large vaults (relative to AMM pool size) coming up for liquidation"? What bad thing happens if we don't?

[turadg]

@turadg For Restival, create a new ticket to clean up liquidation selection in Vault Manager.

#4571 is the portion we need for Restival.

[rowgraus]

The problem statement isn't clear to me. Why should we protect against "large vaults (relative to AMM pool size) coming up for liquidation"? What bad thing happens if we don't?

Problem statement updated to clarify

[dckc]

@dtribble what's left to do on this? Did you mean to close it? For the purpose of #5062, I presume you did.