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Liquidity pool holds token X. User decides to short token X. Pool collects collateral from user, then market sells token X. User can buy token X back and return
by zachrosen23 4y ago
Liquidity pool holds token X. User decides to short token X. Pool collects collateral from user, then market sells token X. User can buy token X back and return to pool at any time. If not returned and liquidation threshold reached, off-chain bot triggers liquidation for a % reward.
- PaulHoule 4y agoSo it runs a liquidity pool that plays the role of the hypothecation agreement in stock trading?
- zachrosen23 4y agoCorrect. The liquidity pool is a smart contract that accepts collateral + trade and stores liquidation threshold. If collateral ratio falls, a bot can trigger liquidation by calling smart contract, smart contract verifies that threshold has been breached, and if so will liquidate collateral to buy back asset.