Liquidations

This page explains the liquidation mechanism in the Alloy by Tether Vaults

The aUSD₮ token is a non-algorithmic, gold-backed tethered asset, designed to ensure that every aUSD₮ is supported by more than one US dollar's worth of XAU₮ tokens. The value of the Tether Gold collateral fluctuates with market changes, and as a result, special actors known as liquidators act to help sustain the over collateralisation of aUSD₮. Liquidators are given specific permission to acts as liquidators.

When a CMP's collateral value falls short of the Liquidation Point, it is made available for liquidation by any liquidator. In the front end, the XAU₮ at which your CMP will be subject to liquidation is referred to as the Liquidation Price.

The liquidation price in the Alloy by Tether Frontend is computed as follows:

$$Liquidation Price = aUSD₮ minted / (AmountCollateral * Maximum MTV)$$

The Vault establishes specific liquidation thresholds determined by the Liquidation Point, or Maximum MTV. The Liquidation Point is 75%. In other words, when the when the value of minted aUSD₮ in a CMP exceeds 75% of the value of the XAU₮ acting as collateral in the Collateralised Minted Position (CMP), the CMP is eligible to be liquidated. When a CMP becomes eligible for liquidation, whitelisted liquidators may return aUSD₮ to the CMP to settle the position in exchange for a portion (or the entirety) of the Tether Gold collateral. The liquidator will receive XAU₮ at a rate of 105% of the aUSD₮ returned by the liquidator. The Liquidator will also pay a "liquidation fee" in aUSD₮ of 0.75% of the aUSD₮ returned to the CMP.

It's essential to emphasize that Alloy by Tether operates as an isolated minting protocol, treating each CMP independently. In the case of users holding multiple CMP, through multiple addresses, each will have unique liquidation eligibility parameters, separate liquidation processes, and other distinct features.

The parameters relevant for liquidations are the following:

1. Position’s MTV: The Minted to Value is determined by dividing the minted aUSD₮ by the value of the XAU₮ collateral (as determined using the information provided by the Price Oracle). It serves as a snapshot of the position's current well-being. A lower MTV ratio implies a higher level of collateral supporting the minted aUSD₮.

2. Liquidation Point: Also known as the Maximum MTV, it is a variable specific to each Vault. For the aUSD₮ Vault, it is 75%. If a CMP's collateral ratio surpasses this liquidation point, the position becomes subject to liquidation by liquidators.

3. Liquidation Premium and Fee: The Liquidation Premium represents the additional XAU₮ collateral awarded to a liquidator for successfully liquidating all or part of a CMP. This premium acts as compensation for the risks undertaken by the liquidator, such as slippage and gas fees, as well as the main monetary incentive for liquidators to keep playing their role in the Alloy by Tether system. The fee is directly deducted from the borrower's collateral. For aUSD₮ the Liquidation Premium is 105% of the aUSD₮ returned to the CMP. The liquidator pays a fee to Tether AbT in aUSD₮ of 0.75% of the aUSD₮ returned to the CMP. For a liquidator to obtain US$105 worth of XAU₮ collateral, the liquidator would need to return 100.75 aUSD₮ to the CMP (100 of returned aUSD₮ and 0.75 aUSD₮ as a Liquidation Fee).