How Liquity Handled its First Big Stress Test

On 5/19/2021, Liquity faced its first big stress test as the ETH price dropped (rather quickly) from ~$3,400 to ~$1,800 on some exchanges. In this post, I’ll provide a brief recap of what happened.

Market Turmoil

First things first, Liquity handled today’s extreme market conditions as designed. As ETH’s price plummeted, we saw over 300 Troves liquidated, some under regular liquidation conditions and some under the liquidation conditions permitted by Recovery Mode, which Liquity briefly entered twice during the chaos.

Big shoutout to Chainlink’s ETH:USD price feed for holding its ground and providing up-to-date price information — keeping Liquity on track!

For those unfamiliar: Under normal conditions, Troves with a collateral ratio lower than 110% can be liquidated. In Recovery Mode, which activates when the Total Collateral Ratio (TCR) of the system drops below 150%, Troves with a collateral ratio lower than 150% can be liquidated.

In the chart above, you can see how quickly the system was able to handle liquidations in times of severe stress — starting the day with 1,054 Troves and ending with ~677 Troves by the time the ETH drop slowed according to Dune Analytics.

In total, 121 Troves were liquidated under normal conditions while 189 Troves were liquidated under Recovery Mode conditions (query here). However, it’s worth noting we don’t have precise data on how many Troves were actually liquidated above 110% in Recovery Mode at this time.

Either way, facilitating liquidations in this manner kept Liquity healthy and allowed the system to bounce quickly out of Recovery Mode each time it entered. In fact, the bounces happened too quickly for Dune to pick up on:

Despite the large amount of liquidated positions, the Stability Pool was able to effectively absorb all of the defaulted debt. ~93.5M LUSD debt was offset against the Stability Pool and ~48,668 of liquidated ETH was distributed to Stability Pool depositors. With the ETH price now recovering, this means Stability depositors should be in the green and were able to “buy the dip”.

Note: If you’re unfamiliar with the Stability Pool, I recommend reading Understanding Liquity’s Stability Pool.

Aftermath

Now that the storm has calmed, the system remains in a healthy state with all defaulted debt made whole, Stability Depositors in the green, and a Total Collateral Ratio of 281% at time of writing. Here’s some quick stats summarizing what’s left:

~880M LUSD remains in circulation after ~460M LUSD was burned by users paying back debts, redeeming LUSD, or through liquidations:

~909k ETH ($2.47B) still remains in the system, spread across 677 Troves:

All in all, we’re proud of how Liquity behaved during its biggest test to date. That said, we understand that getting liquidated is not fun, especially when gas fees are a prohibitive factor. You can find a resource on maintaining a “safe” collateral ratio here. If you need support or have questions about Liquity and how it works, feel free to join our Discord.

Note: Stay tuned for a sequel where we cover LUSD’s price behavior, as we believe Coingecko’s price data may not be telling the full story. We’re still gathering the data and will put something out ASAP.

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