What is Liquity going through in the “519” market crash?

How did Liquity maintain a relatively stable operation amidst the market shakeout as Ether quickly fell to $1,800?

What is Liquity going through in the “519” market crash?
How did Liquity maintain a relatively stable operation amidst the market shakeout that saw Ether fall rapidly to $1,800? …Ether,Market,DeFi,Chainlink,Gas,Liquity Ether Market DeFi Chainlink Gas Liquity
How does Liquity remain relatively stable amidst the market shakeout of Ether’s rapid drop to $1,800?

Original Article Title: “See how Liquity can save the day in the midst of the plunge and shock
By: IOSG Ventures

On May 19, 2021, the price of ETH rapidly dropped from $3,400 to $1,800, and other coins also plummeted, sending the entire market into a downward spiral in a short period of time. At the same time, Liquity also had its first major test, including the pledged assets of 600,000 ETH by Sun Yuchen, the founder of Wavefield, which was also nearly liquidated. In this article, we take a good look at the whole process.

What is Liquity going through in the "519" market crash?

Liquity enables users to borrow ETH at 0% interest, a collateral rate of less than 110%, Liquity is entirely algorithmically controlled, based on game theory logic, with no human intervention. Yet even though Liquity is theoretically well-designed to handle extremely volatile environments, nothing demonstrates the robustness of its protocol design mechanisms better than an actual market shock. Especially in extreme down shocks like the one on May 19, Liquidity proved to be very robust indeed!

When the price of ETH plummeted, 300 addresses were liquidated, some in normal liquidation and some in [recovery mode] liquidation. Liquity went through 2 liquidation patterns during this shock.

For those readers who are not familiar with Liquity, here’s a quick refresher: Normally, positions with a collateral ratio below 110% are liquidated. In [Recovery Mode], when the system Total Collateral Ratio (TCR) falls below 150%, all positions with a collateral ratio below 150% will be liquidated.

What is Liquity going through in the "519" market crash?

Data source: https://duneanalytics.com/dani/Liquity

In the above figure, we can see how quickly the system handles the clearing process under extreme stress, from 1054 addresses at the beginning to 677 at the end of the clearing process. 121 addresses were cleared in normal mode and 189 in [recovery mode]. This clearing mechanism allows Liquity to run healthily and to jump out of [recovery mode] quickly. In fact, the transition between the two modes was so rapid that Dune did not have time to capture the data.

What is Liquity going through in the "519" market crash?

Despite the large number of liquidations, the Stabilization Pool was able to efficiently handle all bad debts. Approximately 93.5 million LUSD debts were liquidated and an additional 48,668 ETH liquidated were allocated to Stable Pool depositors.

So, will the liquidation result in increased price pressure on ETH?
The liquidated ETH is not sold on the market, but is distributed proportionally to all Stabilization Pool pledgers, each of whom can choose whether to sell or hold their share.

Maximum amount of liquidation top 5

What is the price of LUSD?
LUSD experienced the largest volatility since its launch, however, it is important to note that its price was still fluctuating around $1.

This confirms the hard peg mechanism in Liquity’s design. That is, arbitrageurs can buy LUSD in the market as long as it is trading below $1; they can then redeem ETH based on the face value of LUSD ($1) and the ETH:USD pair price given by Chainlink’s prophecy machine, thereby locking in a risk-free return. The redeemed LUSD comes from the most risky positions, while improving the overall health of the system.

On the other hand, the 110% minimum collateralization rate at $1.1 creates a natural price ceiling, as borrowers can make immediate profits by borrowing the maximum amount against their collateral and selling LUSD in the market at prices above $1.10 as long as LUSD is above this threshold.

Going back to the performance on May 19, initially we saw a price spike that drove LUSD to nearly $1.10. This was expected behavior as the drop in ETH prices caused many borrowers to realize the risk of being liquidated and therefore rush to pay off their debts, driving demand for LUSD.

At its lowest point, the LUSD price reached $0.91, however, it quickly recovered its anchor value due to the arbitrage forces mentioned above.

What is Liquity going through in the "519" market crash?

Follow-Up
The storm has calmed down and the Liquity system is still operating at a stable level, with all defaulted debts paid and stable depositors in the green, with Liquity’s total collateral ratio at 281% at the time of writing. The following are some of the summary data.

What is Liquity going through in the "519" market crash?

After users have paid off debt, redeemed LUSD or burned about 880 million LUSD through liquidation, there are still about 880 million LUSD in circulation.

What is Liquity going through in the "519" market crash?

Approximately 909,000 ETH (worth $2.47 billion) remain in the system, spread across 677 addresses.

Overall, we are very pleased with how Liquity handled this test. Liquidation is no fun, especially when gas costs are high. But it did prove possible to maintain a relatively safe collateral rate with Liquity.

What did we see in this crash?
Nothing validates the effectiveness of a protocol better than its performance in extreme market crash environments such as 5.19.

The 5.19 event was a real stress test for the Liquity protocol.

Liquidity performed quite robustly, with the system securing sufficient ETH collateral and LUSD remaining anchored to the USD.

Within a short period of time, Liquity’s system collateral ratio dropped below 150%, automatically triggering “recovery mode

A total of 50,000 ETH from approximately 400 addresses was liquidated and allocated to the stabilization pool

The largest single liquidation amount exceeded 17,000 ETH!

Liquidation does not put selling pressure on ETH as the collateral is allocated to the liquidity pool on a pro-rata basis.

Most of the ETH is liquidated for less than $2,000, resulting in huge profits for the pledgers of the stable pool

Reference reading.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-liquity-going-through-in-the-519-market-crash/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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