Bad Debt

Kurrency considers WCD as ‘Bad Debt’ when the value of collateral is lower than minted WCD. Although highly unlikely to occur, Bad Debt is a potential risk for all DeFi Protocols that offer lending services.

In a standard Liquidation process, Liquidator proxy repays and burns all WCD, thereby preventing Bad Debt. However, if collateral depreciates rapidly in short period of time, and not all outstanding debt of a position can be repaid even after selling entire collateral of the position, Bad Debt may occur.

All WCD of Kurrency is over-collateralized, which allows WCD to establish and maintain a stable price. Therefore, Bad Debt is one of the biggest threat to WCD Price.

Scenario : Bad Debt

Bad Debt may occur when collateral depreciates significantly within a short period.

1. User A mints WCD with collateral

2. Depreciation of collateral (or accumulation of Stability Fee) leads LTV to significantly exceed 2nd Liquidation LTV

3. Liquidators can proxy repay up to [Collateral / (1 + Liquidation Fee)] of User A’s Outstanding Debt

4. [Proxy Repayment x (1 + Liquidation Fee)] is liquidated from User A’s collateral. If Liquidator has proxy repaid the maximum in Step 3, entirety of User A’s collateral is Liquidated

5. Liquidation is concluded if there are no (or very minimal) collateral remains. The remainder is recorded as Bad Debt when LTV > 1

It is difficult to view Bad Debt as flaw in contract itself. As described, Bad Debt occurs due to factors outside the control of Protocol and is inherently a potential risk of DeFi Protocols.

While in principle, Bad Debt cannot be attributed to Protocol, Kurrency Team has designed our contracts to be able to trace Bad Debt, and will continue to work with our users to address the issue of Bad Debt.

Bad Debt Countermeasure

Below is countermeasure for Bad Debt :

1. Outstanding Debt (WCD to repay) remains although no (or minimal) collateral remains after Liquidation

2. Kurrency Bot completes Liquidation when minimal collateral remains. This process may incur loss on Kurrency Team

3. Outstanding Debt is recorded as Bad Debt, and Stability Fee no longer accrues

4. Portion of Outstanding Debt corresponding to Stability Fee is distributed to WCD Earn. Therefore, WCD Earn Depositors are protected from loss of Bad Debt

5. Bad Debt is transparently disclosed, and anyone may burn Bad Debt.