Troves and Collaterization

What is a Trove?

A Trove in Quill is a user-owned smart contract that holds deposited collateral and tracks the debt associated with minting $USDQ stablecoins. When users deposit their assets into a Trove, they can borrow against this collateral to mint $USDQ. Troves are central to maintaining collateralization and stability within the Quill ecosystem, securing each $USDQ with sufficient backing.

What is a collateral?

Collateral is an asset that a borrower pledges to a lender as security for a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the debt. Collateral can be physical, like real estate or vehicles, or financial, such as stocks, bonds or digital assets in the context of DeFi. Using collateral reduces the lender’s risk, enabling the borrower to access larger loans or better terms depending on the value and stability of the collateral provided.

What assets can be used as collateral in Quill?

In Quill, users can deposit ETH, staked Ethereum derivatives such as wrapped staked Ethereum (wstETH), wrapped ETH (wETH), wrapped EtherFi ETH (weETH) and SCR to open a Trove. These assets provide a decentralized and yield-generating source of collateral, enhancing both stability and user returns within the protocol.

What happens if the collateral value fluctuates?

If the value of collateral assets in a Trove fluctuates, it affects the collateralization ratio of that Trove. When collateral values rise, the Trove’s collateralization ratio improves, reducing the risk of liquidation. Conversely, if the collateral’s value declines, the Trove may fall below the minimum collateralization threshold, increasing the risk of liquidation to maintain the protocol’s solvency and $USDQ stability.

How does liquidation work in Quill?

A Liquidation in Quill is triggered when a Trove’s collateralization ratio falls below the required minimum. When this happens, the Trove is closed and its collateral is partially or fully sold to maintain the system’s overall collateralization. Quill’s liquidation mechanism is designed to be efficient, prioritizing under-collateralized Troves and distributing (pro-rata) the recovered collateral to Stability Pool.

What are the risks associated with using Troves?

Using Troves comes with some risks:

• Liquidation Risk: If the collateral value drops significantly, a Trove may become under-collateralized and be liquidated. Users could lose part or all of their collateral if they are unable to maintain their Trove’s required collateralization ratio.

• Volatility Risk: Staked Ethereum derivatives, while yield-generating, are still subject to market fluctuations. Large price drops could impact the security of the Trove and the protocol’s stability.

• Protocol Risk: As with any DeFi protocol, there’s a risk associated with the underlying smart contracts. Although Quill is based on Liquity V2 and has undergone security audits, smart contract risk can never be ruled out 100%.

By managing the collateralization ratios, users can mitigate some of these risks and maintain a secure position within Quill’s stablecoin ecosystem.