Bad Debt Management

The Lending pool contract is responsible for assigning bad debt to the backstop - auctioning it off - and socializing it if it cannot be auctioned off.

Bad Debt Assignment

Bad debt is assigned to the backstop when a user's account no longer has any more collateral.

When a user's account is fully liquidated, if they do not have enough collateral a liquidator may only repay a portion of their debt. After this - the user's account will only have debt and no collateral. Then, anyone can call the bad_debt() function to transfer all debt from the delinquent user to the backstop. The bad debt is transferred by adding it as debt positions to the backstop's pool positions.

Bad Debt Auctions

Bad debt auctions are used to auction off bad debt to liquidators in exchange for a portion of the backstop deposits. They are initiated using the create_bad_debt_auction function and are carried out the same way as liquidation auctions except they sell backstop deposits instead of collateral. Bad debt auctions are filled by calling the submit() function with a fill_bad_debt_auction Requeststruct. When they are filled all the bad debt positions that have been added to the backstop's pool positions will be transferred to the fillers positions.

Bad Debt Socialization

When bad debt auctions are filled - if the backstop no longer has over 5% of the backstop threshold but still has bad debt positions - the backstop's remaining debt positions are burned which socializes the bad debt, reducing the value of all deposits of this asset in the pool.