⏳Liquidation

What is liquidation?

Liquidation refers to the process of converting assets into cash or cash equivalents by selling them on the open market.

Liquidation in the BitU Protocol occurs when the market value of the collateral, such as $BTC, used to mint $BITU stablecoin drops below a critical level (minimum Collateral Ratio).

This decline triggers a forced closure of the user's minting position, preventing them from using the minted $BITU to reclaim their collateral.

The liquidated collateral is then sold for $USDT on the open market. Users retain ownership of the $BITU they minted, which they can sell or stake in the Staking contract for rewards.

When Does Liquidation Occur?

Each asset in the BitU Protocol has different risk parameters. For example, the default collateralization rate for minting $BITU with Bitcoin is 200%. This implies that to mint $100 worth of $BITU, one must deposit $200 worth of Bitcoin.

The minimum collateralization rate for Bitcoin is set at 200%, meaning at least $200 worth of Bitcoin is needed to mint $100 worth of $BITU.

If the Bitcoin's price drops such that the collateral worth $200 is now valued at $120, the collateral ratio falls to 120%, entering a critical zone but not yet triggering liquidation.

Liquidation occurs when the collateral value drops to $110, reducing the collateral ratio to 110%, which meets the liquidation threshold. At this stage, the collateral is sold for $USDT, the mint position is closed, and the user cannot use the minted $BITU to reclaim their Bitcoin.

However, if the collateral's value increases before reaching the 110% threshold, the position remains safe from liquidation.

Disclaimer/Reminder: Users who mint $BITU are required to actively manage their positions and maintain a healthy collateral ratio to avoid liquidation.

How are liquidated collateral assets handled?

After liquidation, the collateral assets sold for $USDT will be divided into two parts.

The first part, $100 $USDT, will be stored in a custody address to support the $100 $BITU held by the liquidated user, ensuring that all circulating $BITU in the market has sufficient value backing it.

The second part, if liquidation occurs in a timely manner, will generate an additional profit of $10 $USDT from selling the collateral at a 110% collateralization rate. This liquidation profit of $10 will be transferred to the insurance fund.

How to avoid liquidation?

To minimize the risk of liquidation when minting $BITU with volatile assets, users should promptly add more collateral or redeem some $BITU to recover their assets when the market value of their collateral drops.

Liquidation risk control

Besides individual liquidation processes, BitU Protocol features a global risk control system. This system activates Safe mode (read below) for the entire protocol when the overall collateralization rate of all risky assets drops to 130%, aiming to mitigate broader financial risks.

Safe mode

In Safe mode, all new $BITU minting is temporarily halted. This operational pause affects the BitU ecosystem in several ways:

• Risk Mitigation: Users whose collateralization rates are nearing the minimum threshold are encouraged to increase their collateral or return the minted $BITU to avoid potential liquidation.

• Market Fluctuations: The prices of collateralized assets may continue to fluctuate, either increasing or decreasing.

During this mode, BitU’s ALMM actively liquidates positions that are below the critical collateralization rate, aiming to restore the overall collateral rate of risky assets above 130%.