The pool that pays liquidated debt

The Stability Pool is the first absorber of bad debt. People deposit USDL into it. When a vault is liquidated, USDL equal to that vault’s debt is burned from the pool, and the vault’s collateral is transferred in. Depositors lose a pro-rata share of their USDL and gain a pro-rata share of the collateral. They also accrue LOAN. There is no minimum lockup. A withdrawal is suspended only while some vault is already under 110% and still waiting to be liquidated.

Why a liquidation is usually a gain

Liquidations are allowed just below 110%, so the collateral coming in should be worth more dollars than the USDL burned, before the 0.5% that goes to the liquidator. The docs’ example: the pool holds 1,000,000 USDL, you have 100,000 of it, and a vault with 200,000 USDL of debt and 57.57 ETH is liquidated at an ETH price of $3,788, a ratio of 109%. Your 10% share loses 20,000 USDL and receives 5.757 ETH, worth $21,800 at that price. The stated net is $1,800. You can withdraw the ETH, or the PLS on PulseChain, and sell it. If you hold it and the coin falls, the gain can disappear.

The gain is not guaranteed. A vault liquidated below 100% of its debt, in a crash or from a bad oracle print, pays depositors less collateral than the USDL they lose. If USDL itself is trading above a dollar of collateral, a liquidation can be unprofitable on a mark-to-market basis even above 100%, and that this only becomes a realized loss if you withdraw and sell the USDL above a dollar. On Base the oracle is Chainlink ETH:USD. Tellor is the fallback when Chainlink is more than four hours stale, when the call reverts or returns an invalid price or timestamp, or when two consecutive Chainlink updates differ by more than 50%. PulseChain uses a separate price-feed contract and a decentralized PLS:USD price.

If the pool is empty

Redistribution is the second path. The liquidated debt and collateral are assigned to the other active vaults in proportion to the collateral those vaults already hold. A mixed liquidation happens when the pool covers only part of the debt: that part is offset, the matching fraction of collateral goes to depositors, and the rest is redistributed. A pure offset means the pool covered the whole debt.

The gas compensation is 200 USDL + 0.5% of the vault’s collateral. The 200 comes from the reserve the borrower posted. The 0.5% comes out of the collateral, which slightly reduces what depositors receive.

Recovery Mode

Recovery Mode starts when the total collateral ratio falls below 150%. It is not a pause. It is a tighter set of rules meant to pull the system back over that line, The threat of it is supposed to keep the system from arriving there.

• Borrowing that would lower the system ratio further is blocked.
• New USDL can still be issued by opening a vault at 150% or higher, or by changing an existing vault in a way that improves its ratio.
• The borrowing fee is 0%. The redemption fee is unchanged.
• A vault under 150% can be liquidated if the Stability Pool has enough USDL to cover its debt. A vault at 150% or above is left alone.

The loss in this mode is capped at 110% of the debt. Collateral above that, and below the system ratio, goes to the collateral surplus pool and the borrower can claim it. A borrower liquidated here takes the same 10% penalty as in normal mode. If the pool cannot cover a vault whose ratio is still between 110% and 150%, the system does nothing to that vault.

Getting a vault back to safety in this mode means adding collateral, repaying debt, or both, until the ratio is at least 150%.