Liquidation 3.0) Slash Auction

In an efficient market, liquidations to the Reserve Fund should always occur at a CR > 100%, the Reserve Fund should always have a balance of ZUSD to meet liquidations, and Collateral Auctions should present an arbitrage opportunity to raise enough ZUSD to cover debts. Given these incentive mechanisms, there should always be an incentive to complete a liquidation through the first 2 failsafes. These profitable opportunities on liquidations represent profitable opportunities for Maximal Extractable Value (MEV), where validators are incentivized to either push through or author their own transactions to capture this profit. Effectively, the failure of the liquidation and collateral auction mechanisms to raise the outstanding balance of ZUSD will only occur in the presence of an inefficient market, where market participants, validators included, are foregoing potential profit.

To incentivize network validators to enforce liquidations and maintain an efficient market, either through forcing through transactions or authoring their own, a slashing penalty will be applied to all validators should liquidation mechanisms 1 and 2 fail to raise enough ZUSD to cover debts. In the event of slashing, a Slash Auction will be performed for up to 90% of the CTZ collateral of all validators. In a Slash Auction, bidders will compete by offering to accept decreasing amounts of CTZ for the fixed ZUSD amount they will end up paying. This ZUSD amount will be burnt and removed from circulation to cover the outstanding debt, and the settled upon quantity of CTZ will be slashed proportionately from the stake of all validators and allocated to the winning bidder of the Slash Auction.

The Slash Auction mechanism incentivizes Citizen validators to push through transactions to enforce liquidations, and effectively serves as a collateral backstop to the outstanding supply of ZUSD. It is only required that one validator acting honestly in their rational self interest will either 1) enforce the liquidation or collateral auction, or 2) bid the fair market price of ZUSD in terms of CSTK to cover the outstanding debt in a Slash Auction. The results of a Slash Auction must be confirmed and approved through consensus in order to proceed and implement the results.