How to stay protected from redemption risk in Liquity
Last updated
Last updated
As a first step, we recommend reading more about the redemption mechanism and getting to know how it works in more detail. Our previous article covers the general aspect of how it functions. The redemption risk in Liquity protocol represents the risk of your Trove being redeemed by a third party, in case of a low collateral ratio relative to the rest of the Troves in the protocol. While the liquidation ratio in Liquity is set to 110% (150% in Recovery Mode), redemptions can theoretically happen at any ratio. One of the best indicators of the redemption risk in Liquity is the "Debt in front" metric, representing the sum of the LUSD debt of all Troves with a lower collateral ratio than you. Debt-in-front metric indicates the LUSD amount to be redeemed before affecting your Trove and can be found on the Liquity dashboard.
Underneath is an example of two tools available on DeFi Saver that can help in mitigating redemption risk:
1. Notify feature
As a first step, users can set up a Debt-in-front monitor, receive notifications when the Debt-in-front of their position falls below the threshold amount, and (manually) manage their position accordingly. More details about Notify available in the General segment of our Knowledge Base.
2. Redemption Protection automated strategy
Users wishing their position to be automatically adjusted based on the Debt-in-front threshold can utilize a DFS automated strategy called "Redemption Protection". The strategy automatically would repay the position to increase the ratio by a configured percentage increase (e.g. +20%).
We can also recommend utilising our stats dashboard for Liquity where you can preview all of the active Troves currently and also sort them by Ratio/Collatera/Debt.