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Redistribution

How Hubble socializes debt to manage edge case liquidations.

Hubble Protocol is built for USDH resiliency and sustainability. There are two edge cases where debt and collateral can be distributed throughout the protocol in order to liquidate accounts that have surpassed their liquidation threshold.

What Happens When the Stability Vault is Empty

If there is nothing in the Stability Pool (Stability Vault), then Hubble needs to find another way to back the undercollateralized USDH. The smart contract does this by redistributing debt among other debt holders.

For instance, if Hubble needs to distribute a debt of 100 USDH which is backed only by 105 worth of SOL, then 100 USDH is distributed among all debt holders and 105 worth of collateral is distributed to all. The amount users receive is based on their debt percentage of the entire pool.

Here is an example situation:

                user#1      user#2      user#3      user#4      user#5
SOL (in USD)    +100        +300        +60         +70         +70
ETH (in USD)    +100        +100        +60         +60         +40
Total Coll      +200        +400        +120        +130        +110
Debt (USDH)     -100        -100        -100        -100        -100
Net Value       +100        +300        +20         +30         +10
LTV               50%        25%         83%         76.9%       90.9%

Let's say Hubble liquidates user 5. The remaining users have these positions:

                user#1      user#2      user#3      user#4
SOL (in USD)    +100        +300        +60         +70
ETH (in USD)    +100        +100        +60         +60
Total Coll      +200        +400        +120        +130
Debt (USDH)     -100        -100        -100        -100
Net Value       +100        +300        +20         +30
Pool Pct        25%         25%         25%         25%
LTV              50%        25%         83%         76.9%

Then every user receives 25% of the debt and 25% of the collateral:

You can see that:

  • Net value increased

  • LTV decreased for some, and increased for others

What Happens When There's Bad Debt

In the event that collateral assets lose value faster than they can be liquidated, then a redistribution is triggered that bypasses the Stability Vault, even if it contains USDH. This can occur if there's a flash crash, if the liquidity for an asset becomes thin on Solana, or if an asset loses its peg/backing and is no longer valuable.

For example:

  • User has 100 USDH debt and $130 Collateral

  • LTV = 76.92%

  • Each USDH is backed by $1.30 of assets

Then, collateral value suddenly drops to $95

  • User still has 100 USDH debt, but collateral is worth $95

  • LTV = 105.26%

This loan is now undercollateralized, or has incurred "bad debt" for the protocol. Each USDH in the loan is backed by less than $1 of crypto.

How Distribution Works in Case of Bad Debt

When a loan incurs bad debt, the Stability Vault does not burn 100 USDH as it would with a standard liquidation, and the collateral is not distributed to Stability Vault depositors. Instead, 100% of USDH debt and 100% of collateral are redistributed across all loans on the platform, following the same logic as though the Stability Vault were empty.

Following the above example, this would mean:

  • 100 USDH debt is distributed across all loans

  • $95 collateral is distributed across all loans

The net effects of this are:

  • Higher aggregate LTV ratio across the platform

  • Users may receive assets they might not have originally held in their loan

Bad Debt Distribution Example

Let's say the SOL price drops by 50%

In this scenario, user #5 has incurred bad debt. Meaning his collateral of $90 SOL and his debt of 100 USDH will be evenly distributed across the rest of the users.

This means each user receives:

  • 100 / 4 = 25 USDH debt

  • 90 / 4 = $22.5 SOL collateral

The effect would be:

Following the redistribution, each loan on the platform has:

  • Lower net value

  • Higher LTV ratio

In the case of User #1, prior to redistribution, they only had ETH exposure. However, the redistributed loan contained SOL, which means that each user receives SOL upon redistribution. This results in User #1 having SOL exposure, following redistribution, without ever having manually added SOL as collateral in their loan.

Note that, if a loan initially has an at-risk LTV, redistribution can nudge the LTV over the maximum LTV, resulting in liquidation. For example, had User #4 had $2 more debt, their loan would have reached the 80% max LTV, and been at risk of liquidation.

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