SIP-391: Liquidations on Synthetix using Pyth's Express Relay

Simple Summary

Douro Labs proposes for Synthetix on Base to adopt Express Relay (testnet revealed here: https://forum.pyth.network/t/express-relay-prototype/569) to convert margin positions that are eligible to liquidation to USDC through the protocol’s network of Searchers:

• The goal is to reduce slippage through competitive bidding
• Applicable to both spontaneous and forced liquidations
• Synthetix LPs receive USDC and improve their UX instead of receiving non-USDC collateral as currently the case

Abstract

The proposed liquidation process can be broken down to the following:

• when a user’s position becomes eligible for liquidation, the margin (when denominated in X, X ≠ USDC) is offered to Express Relay for conversion to USDC at the current Pyth price or at a discount (Synthetix protocol to decide)
• searchers compete over the liquidation by bidding a premium denominated in USDC
• the winning searcher with the highest premium amount pays the premium and amount of USDC, and receives the associated amount of X
• the sum of the amount of USDC + premium is paid and distributed to LPs on Base, instead of distributing X, resulting in better UX

Motivation

• Express Relay prevents opportunistic transaction ordering surrounding liquidations
• Express Relay has searchers that can measure arbitrage opportunities on CEX’s and DEX’s that enables to measure the premium that can be paid on top current or discounted Pyth price, specific to the quantity of margin to be liquidated

Specification

1. The adoption of PER is contingent on the support of multi collateral by Synthetix, proposed and adopted here: https://sips.synthetix.io/sips/sip-383/

2. On the assumption that the time from which a margin position becomes eligible for liquidation can advertised to Express Relay, Douro Labs will add a feature to allow Synthetix to configure a time limit for the auction to resolve.

3. Synthetix can set a slippage threshold that the application would tolerate to liquidate margin at: when making a margin position in X token eligible for liquidation, the protocol can verify against the current spot price for X/USDC (using Pyth prices) and advertise the position with a discount that represents the slippage allowed. Searchers would then bid using their respective valuations

4. Synthetix can constrain the liquidation to be permissioned through Express Relay only if the conditions 2) and 3) are met. There is also a receipt method for sharing proceeds from the auction through receiveAuctionProceedings

Copyright

Copyright and related rights waived via CC0.