Collateral Ratio

In order for synthetics to be minted, a minimum collateral ratio must be maintained. Stakers act as a pooled counterparty to all synthetics. They take on risk via the debt in the system.

For example, a staker providing 1 ETH to the debt pool (where $1000 = 1 ETH) at a 300% collateral ratio, will allow $333 worth of synthetic assets to be minted.

The collateral ratio allows the system to operate under stressful market conditions. For example, if $333 worth of synthetic’s are minted with $1000 = 1 ETH debt pool. Suddenly in an edge case, ETH price falls by -70% to the dollar. Now $300 = 1 ETH. The collateral ratio now falls from 300% to 90%.

In the above event stakers are at risk of a liquidation event.

Liquidation Event

If the collateral ratio of a staker falls below 300% they will have 10 hours to raise their collateral ratio, they can either

a) Self-Liquidate – raise their collateral ratio back to 300% by minting more debt

b) No self-liquidate - Your capital will be liquidated accordingly. In the example above 0.7 ETH will be liquidated as a penalty and distributed to other stakers. A staker would retain 0.3 ETH.