Liquidation 1.0) Reserve Fund

When performing a liquidation to the Reserve Fund, the collateral will be automatically moved into the Reserve Fund and swapped for ZUSD. Given that Banks are always liquidated at collateralization ratios marginally beneath 110%, the liquidation swap raises enough ZUSD to cover the outstanding debt, and liquidity providers to the Reserve Fund receive the collateral at a discount.

If there is not enough ZUSD liquidity in the Reserve Fund to cover the liquidation debt, then the Bank collateral will be auctioned off to bidders in a Collateral Auction.

In the rare but possible scenario that a liquidation process begins for a Bank with a CR < 100%, the protocol will avoid losses for the Reserve Fund LPs. Instead, 100% of the collateral will be swapped 1:1 into the Reserve Fund. In the event that a Bank is liquidated at a CR of 95%, all of the collateral is liquidated 1:1 into the reserve fund, but 5% of the ZUSD loan outstanding needs to be covered. In this instance, because there is no collateral left to be auctioned off in the Collateral Auction Market, the protocol will bypass step 2 and proceed directly to the Slashing Auction. Validator’s CSTK will be slashed and auctioned off to cover the remaining outstanding ZUSD balance.