Liquidation

Liquidation ratio

A vault’s reserves will be liquidated if its reserve ratio drops below a certain threshold, known as the Liquidation Ratio. This ensures there are always enough reserves to back all the Tabs in circulation. Liquidations are conducted automatically through the Tab Protocol Auctions.

Liquidation auction

When a vault is liquidated, its reserves are sold off in a special type of auction called a Dutch auction. Here’s how it works:

1. Auction start: The auction begins at a high price for the reserves and gradually lowers the price until enough reserves are sold to cover all the Tabs issued from that vault, including any risk penalties.

2. Auction process: The price keeps dropping until either all the needed reserves are sold, or the price reaches a set minimum. The auction is open to everyone, but bids must be in the same Tab currency as the vault being liquidated.

3. Initial price and reductions: The auction starts at a price slightly below the market price of the reserves (this is called the Auction Start Discount). If the first round of selling doesn’t cover all the Tabs, the price will drop further at regular intervals (the Auction Step Discount) until it hits a Minimum Liquidation Price, which is the lowest price that can still cover the outstanding Tabs.

This process ensures that there are always enough reserves to back the Tabs, maintaining the stability and reliability of the system.