Liquidation is a key piece of functionality, critical to maintaining the price peg of kUSD and solvency of Kolbiri as a project. Today, liquidation is a manual process and one that is very much first come first serve.
This is not necessarily a problem, but there is an incentive for the technically savvy to capitalize on liquidation opportunities by writing bots or other automation. Could the protocol instead be adapted to strengthen the Kolibri DAO instead of benefitting opportunistic and savvy liquidators?
I’d like to propose a concept of auto-liquidation which in essence means a governance update to remove manual liquidation and to add functionality to automatically liquidate ovens that become insolvent. I break the problem into three distinct components: liquidation signals, liquidating, and distribution.
To know that an oven is liquidatable, today, Kolibri relies on the Harbinger oracle. As we saw this past week, it is not 100% reliable. A pre-requisite of this proposal may be to have a more robust oracle, independent of the happenings of any centralized company (Coinbase). On the other hand, if the oracle is good enough for Kolibri, it is likely good enough for auto-liquidation – we may be able to decouple this concern.
To liquidate an oven we need to pay for transactions. Since the DAO does not have keys, it can’t pay for transactions. I lack the Tezos technical sophistication to solve this issue, though I could imagine the DAO voting to create a multi-sig wallet that is able to execute these transactions…maybe there’s a more pragmatic approach.
After the key issue is solved there’s the question of how do we pay for these transactions? As a requirement for auto-liquidation I’d like to say that liquidation needs to be self-sustaining. This means, the transaction cost for liquidation should never be able to exceed the liquidation bounty as this creates an exploit to bankrupt the DAO. During liquidation, the funds retrieved are returned to the DAO, which covers the transaction costs of the liquidation operations. This brings us to…
Ok, so now we have a new revenue stream to the DAO for ovens that are able to be auto-liquidated, what next? The DAO could choose to build up supply and potentially lower stability fees as a result, or instead pay dividends to DAO members.
Open to any and all questions, comments, and technical input for those who’ve spent more time understanding the Tezos protocol than I.