Stability Pool and Liquidations

The Stability Pool is a central mechanism in Virtue that allows users to contribute VUSD to help absorb under-collateralized debt, in exchange for a share of the liquidated collateral.

What makes Virtue unique is its single shared pool design: by depositing VUSD into one pool, you’re automatically participating in liquidations across all supported collateral types — no need to manage separate pools for each asset.

How it works

When a borrower’s position drops below the required Minimum Collateral Ratio (MCR), the system considers it under-collateralized and makes it available for liquidation.

In Virtue, this process happens in five clear steps:

1. Collateral Ratio Drops Too Low When a position’s Individual Collateral Ratio (ICR) falls below the Minimum Collateral Ratio (MCR) — typically due to a drop in the collateral’s price — the position becomes under-collateralized.

2. Liquidation Is Triggered Anyone can call the liquidation function to initiate the process. This earns them a 0.5% collateral reward for helping maintain protocol health.

3. Debt Is Repaid Using VUSD VUSD from the Stability Pool is used to fully or partially repay the borrower’s outstanding debt, depending on pool availability.

4. Collateral Is Claimed The protocol seizes collateral from the liquidated position and: - Applies a 2% protocol fee - Sends 0.5% to the liquidator - Distributes the rest to Stability Pool depositors based on their share

5. Position Is Closed The borrower’s debt is cleared, and their CDP is removed from the system. Any excess collateral may be reclaimable in Recovery Mode.

📘 Example

Imagine a user locks $200 worth of stIOTA as collateral and mints 100 VUSD. Later, if stIOTA drops in value and the user’s collateral ratio falls below 110%, the position becomes eligible for liquidation.

Here’s what happens:

• The system uses 100 VUSD from the Stability Pool to repay the user’s debt

• The protocol takes roughly $110 worth of stIOTA

• From that, 2% is charged as a protocol fee, and 0.5% goes to the liquidator

• The remaining stIOTA is distributed to all VUSD depositors in the pool

Recovery Mode Adjustments

When market conditions turn extreme and a collateral type’s Total Collateral Ratio (TCR) drops below a critical threshold (RMT), Virtue enters Recovery Mode for that asset.

In this state:

• Only collateral equal to 110% of the debt value is liquidated

• Any leftover collateral remains with the original owner

• The same fees and reward structure still apply

Consideration for Stability Pool Depositors

While the Stability Pool offers opportunities to earn collateral from liquidations, it’s important to note one key risk:

Asset Volatility

The collateral you receive (e.g., stIOTA) may fluctuate in value after liquidation. Even if you acquire it at a discount, rapid price drops can result in losses relative to the VUSD you initially deposited.

Stability Pool returns depend on market conditions — the more stable the collateral, the more predictable the rewards.

Why it Matters

The Stability Pool is not only a yield opportunity — it’s a key part of how Virtue defends the VUSD peg and preserves solvency. Contributors are rewarded for stepping in when the system needs liquidity most, and the shared-pool structure makes it simple to participate.