In the first article of this series, we delved into the launch of Vaults, the innovative new minting mechanism from Inter Protocol, and its impact on IST's expansion across the interchain.
In this second article, we’ll be diving deeper into the design of Vaults, and the associated functionality and product features that have been introduced to help IST remain reliable, robust, and stable.
Liquidation Auctions are an essential component of the IST Vaults system, designed to manage and mitigate risks associated with collateralized debt positions (CDPs). When a Vault's collateral value falls below a specific threshold (the liquidation margin), it becomes subject to liquidation to ensure the system's solvency. Maintaining the solvency of Inter Protocol is crucial, and effective liquidation plays a vital role in this process.
Avoiding liquidations is in the best interest of both users and the protocol. Regular liquidation checks are carried out at various time intervals, and Vaults are liquidated based on the price at the time of these checks. This approach allows users to anticipate potential liquidations ahead of time and adjust their Vaults to a secure position before it happens.
If liquidations do occur, the system consolidates all liquidated vaults associated with a specific collateral type and initiates an auction to address the combined debt of these vaults.
The liquidation auction uses a descending clock auction mechanism, which commences at or above the current oracle price. As the auction progresses, the price steps down incrementally, filling bids as it descends until it reaches its final step price or until all collateral is sold.
Agoric OpCo has built a CLI (Command Line Interface) tool that allows users to place bids on liquidation auctions at any time.
Vaults always consider IST to be worth $1 USD. However, to calculate collateralization ratios, Vaults need to know the external market price of each collateral type they accept.
This is where the purpose-built decentralized oracle network comes in. It consists of node operators that run existing nodes for both the Chainlink network and the Agoric chain, using nine different tried and tested data providers on the Chainlink network for source pricing, delivering these in near real-time to the chain. These price updates are triggered when either a given oracle node observes a price divergence of ≥1% from its previous price or after a specified amount of time from the last update. The price will update every 10 minutes on-chain, regardless of whether the deviation threshold is met or not.
The oracle network uses Chainlink's open-source software and comprises two parts: the middleware that handles the data provider, node operator, and price feed logic, and the downstream Agoric-chain price aggregator smart contract that accepts and further aggregates pricing for use by downstream Inter Protocol applications such as Vaults and Liquidation Auctions.
The Reserve serves as an additional safeguard for IST, providing a buffer to absorb potential losses and maintain the overall stability of the platform. By accumulating a portion of the fees generated from liquidation penalties, as well as having the ability to hold assets contributed via external contributors, the Reserve can be used to cover any deficits that may arise in the event of extreme market conditions or system failures. It also has a function to burn IST to reduce the debt in a 1:1 ratio through a governed API call.
The Reserve will be accessible via a public facing dashboard for transparency.
The launch of Inter Protocol Vaults creates an advanced DeFi application that includes multiple subsystems that function together to manage risk of the protocol. All of the above systems have been carefully designed and implemented to ensure IST remains robust and stable, and can serve its purpose as the reliable stable token for the interchain.
Having delved into the mechanics behind how Inter Protocol Vaults work, and the surrounding systems in place that secure and maintain the protocol’s safety, in the next article in the series we will explore how protocol governance and the community will help shape the future development of IST and its impact on DeFi across the interchain.