Liquidation Lottery
Welcome back SODIUM friend, let’s talk about another important mechanic of the whole protocol — the Liquidation Lottery.
To explain this part, we will need to talk about liquidation first.
What is liquidation?
As with any type of loan, it is expected that some users who borrow via the SODIUM protocol won’t be able to repay their loan in full and on time. There could be several reasons for that, like decreased collateral value and bad risk management. In such cases, users’ collateralized assets need to be liquidated (sold) in order to cover Liquidity Pool losses.
Since NFT assets are traditionally challenging to liquidate, the SODIUM protocol executes liquidation using a process we call the Liquidation Lottery.
Why would I want to participate?
Liquidation Lottery will often provide a unique opportunity to purchase an NFT asset for a significant discount on its market value. However, it is important to keep in mind that it also may lead to financial losses under critical market conditions.
How do I participate?
To participate in the Lottery, users have to stake SOD into the preferred collection, which will also allow them to earn staking bonuses and a portion of platform fees.
More SOD a user has staked in a collection, the higher chance they have of being listed as a Top 10 winner during a Liquidation Lottery. However, no one is guaranteed a spot in the Top 10, and anyone with SOD staked in that collection has a chance of being selected. Once the Top 10 winners are selected, they will be ranked at random from 1–10.
Read more about staking here
A Liquidation Lottery begins when at least one of the collateralized NFTs within a collection is failed to be repaid. Everyone with SOD currently staked in that collection is obliged to participate in the lottery and will have to participate if they are selected by the protocol.
Winners of a Liquidation Lottery are awarded the chance to purchase an NFT that has been entered into the lottery by settling the debt obligations (amount borrowed + interest) of the initial borrower. The price that this NFT asset can be purchased for during the Liquidation Lottery will hereby be referred to as the Prize Price.
Ok, so how the lottery goes?
A Liquidation Lottery is divided into five phases that play out over a total of 24 hours. The lottery ends as soon as the collateralized asset has been purchased, regardless of time elapsed.
Phase I
Current NFT owners and the Top 10 winners have four (4) hours to purchase the asset on a first come first serve (FCFS) basis. The NFT, as well as any Liquidity Mining bonuses, will be transferred to the new owner upon payment.
Phase II
Any staker with SOD staked in the collection has a four (4) hours window within which they can purchase the asset. The NFT, as well as any Liquidity Mining bonuses, will be transferred to the new owner upon payment.
Phase III
Anyone who wants to participate has four (4) hours to make a purchase on a FCFS basis. The NFT, as well as any Liquidity Mining bonuses, will be transferred to the new owner upon payment.
Phase IV
Top 10 winners participate in the order they were ranked. A user who decides not to purchase the asset loses 100% of their staked SOD as a penalty.
50% of the penalty goes to the protocol Treasury, while another 50% is added to the Liquidity Mining bonus as an additional prize for the next user down in the rankings.
Every participant has one (1) hour to finalize their purchase. Phase III ends after ten (10) hours if no purchase has been made.
Phase V
It is possible that under less-than-ideal market conditions the collateralized asset goes unpurchased. In such a case, the protocol will utilize a Dutch auction model in order to partially cover pool losses.
Starting from the Prize Price, the price is lowered incrementally until an auction participant purchases the asset. The NFT, all Liquidity Mining bonuses, and 50% of the total penalty SOD from Phase IV will be transferred to the new owner. Any losses not covered by the sale of the asset will be covered by the Treasury.
I won the lottery and purchased NFT, what’s next?
You probably got it for a really good price, enjoy!
Stay tuned for more & join the conversation!
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