TLDR: Agoric OpCo is building a dutch auction liquidation contract for Inter Protocol which will allow users to bid directly for Vault liquidations. This is a robust, battle-tested liquidation mechanism which also would be significantly faster to implement and operate than the originally communicated liquidation launch plan.
The release of the Vaults code will allow Inter Protocol to expand user minting of IST beyond centralized and/or bridged stablecoins. This is a core part of Inter Protocol’s value as a product to the ecosystem.
A successful overcollateralized vault mechanism requires a method for the protocol to liquidate vaults when collateral prices decline. The original plan for Inter Protocol as outlined in previous designs included a local AMM that would function initially as the destination for these liquidations. In this design, the protocol would own sufficient liquidity to ensure that liquidations could proceed with minimal price impact. This AMM would function as a product on its own beyond Inter Protocol Vault liquidations, and serve as a focal point for liquidity on the Agoric chain.
However, launching an AMM is a major undertaking which is not strictly necessary for IST. Moreover, the Vault contracts separate liquidation into a separate contract which can be changed/upgraded. Therefore, it’s possible to speed the launch of Vaults by creating a new liquidation contract which eliminates the need for the AMM in the short term.
This liquidation design is a dutch auction which occurs on a regular basis per collateral type and contains methods for users to bid directly or create bidding agents to bid on their behalf across multiple collateral types. Users could specify bids at exact prices or as a discount to oracle prices. More detail is available in the Github issue linked.
This model also simplifies the Reserve contract, which previously needed the ability to mint IST against held assets and manage LP positions. In this new model, the Reserve will simply hold additional assets and manage accounting for liquidation shortfalls. New capabilities for asset management can be added to the Reserve later if they are desired.
Posting here as we would love to hear feedback from the community on this plan. We understand the eagerness for Vaults to go live and want to ensure that’s done as rapidly as safely possible.
Clock auction is a good mechanism for vault liquidations, particularly if there’s a nice api for notifications and participation. A lot of market makers are set up to participate in these kind of liquidations.
The good part of liquidating into an AMM is that you don’t need to find participants for auctions; the bad part is that you push the price of collateral down with the sales. In the long run it might be good to have a bit of both.
so if Im understanding this correctly, theres an auction schedule (will sell X% of collateral over a specific period of time in increments) and the price ticks down every increment. Obviously liquidators want the cheapest price, but they’re at risk of losing out to other liquidators that are willing to accept a higher price.
but the lack of AMM isnt solved here - it looks like the expectation is that liquidators will leverage IBC to send the collateral for liquidation to an Osmosis or Crescent or elsewhere for now until the Agoric AMM is ready, correct?
Cross posting from Discord reply (@effortcapital thanks for posting here as well!)
You’re exactly right. Bidders on liquidated collateral will likely want to offload their collateral off chain as quickly as possible. They’ll be reliant on IBC transactions to do so (or may hold some assets locally at their preferred DEX chani and simply rebalance). This will result in the liquidated assets selling for less than market as the liquidators will add a risk buffer in for the latency of transfer/exchange over IBC.
There are a few short term ways we hope to make this easier. For example, Strangelove has been working on a Transfer, Swap, and Forward IBC transaction that would allow a user to complete the full flow with a single IBC transaction. The Duality folks have spoken with us about an SDK that would make this easy for programmatic liquidators.
Medium term, we fully expect there will be a DEX on locally on Agoric that can receive liquidations. The liquidation contract within Inter Protocol is modular and upgradeable and we expect liquidation capabilities to grow considerably, with the end result being that the liquidator itself can choose amongst a variety of liquidity options (local DEXes, external DEXes, liquidation auctions, standing bids by the reserve, etc).