Idea for Synthetix V3: Liquidations by protocol itself, with profit distribution to SNX stakers

So last night I was studying Liquity.org (MakerDAO competitor) protocol and their elegant liquidations solution. Stability Pool and Liquidations - Liquity Docs

So the way it works is that Liquity protocol liquidates all deliquent accounts itself using stability pool and the distributes the profits among those who are staking in the pool itself.

So my idea is when designing Synthetix V3, have same system where protocol liquidates SNX holders and loan accounts itself, while distributing profits to SNX minters.

Instead of relying on Bot owners and paying them, we can further benefit SNX stakers by liquidating accounts ourselves and keeping money within the Synthetix. What you guys think?

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I think that to an extent, it is a good idea for long term protection of the protocol as it wouldn’t run into a problem such as not having enough bots running to secure the network, but on the same token it does remove some of the decentralization of the protocol as well.

Another thing to consider is the transfer of risk. Being a liquidator incurs its own risk, such as the collateral losing value faster than the incentive amount, alpha loss due to paying transaction fees, and maintaining your own sufficient collateralization so that your liquidator doesn’t get liquidated. One thing to keep in mind with this is these inherent risks would be shifted from liquidators to the protocol itself in certain ways depending on how it would be designed and who the participants in this pool would be (whether it would be SNX stakers as a whole or those who choose to participate within its own pool).

In the former example pool above, it would almost defeat the purpose of a liquidator in general, which is to burn bad synthetix network debt for the incentive of bonus collateral, effectively removing that debt from the network as a whole. In essence, the debt doesn’t disappear really so much as it is transferred to someone else who has the ability to pay it off and thereby remove it from the network. If the protocol itself was the liquidator, the debt doesn’t really leave the network and I think it would occur further risk for all SNX holders.

Now if the pool was part of the protocol, but it had its own individual reward/liquidity pool that supplied the funds to liquidate, only a certain subset of the network would appear to incur the added risk, which I think would be a little more feasable of any option. Would be happy to discuss further, discord is also sicarius

It’s a good idea. I always thought it was odd to have a p2p liquidation system. The argument was that the sUSD must come from somewhere in order to burn to release the SNX. The sUSD could come from the sUSD fee pool pending distribution to stakers for that week perhaps? Which would unlock the SNX at circa 10% discount and distributed to debt pool holders along with that week’s SNX reward quota. However his would add speculation into an automated contract by essentially buying SNX in what would have to be in down market conditions, which could be an issue. Alternatively, it could use a hypothetical sUSD value and just burn the SNX, but that wouldn’t really benefit stakers at all. The only other way would be for a contract to sell SNX on an open AMM pool, which I don’t think is possible?

But yeah, I think this is a better idea then having a p2p UI’less liquidation system without any details in docs, allowing only bot operator devs (i.e. KALEB) to reap all the benefits that really should go back into the DAO that is collateralising properly and staying active.