Mint Selenized Assets

Collateralized Debt Position

New tokens for a listed Selenized Asset can be minted by creating a collateralized debt position (CDP) with either $LUNC, $USTC, $USDC, $bLUNC, sAsset or any whitelisted collateral tokens as collateral. The CDP is essentially a short position against the price movement of the reflected asset, -- i.e. if the stock price of sGOLD rises, minters of sGOLD would be pressured to deposit more collateral to maintain the same collateral ratio.

Collateral

Selenium Protocol accepts the following types of tokens as collateral:

• USTC

• All Selenized Assets

• Other collateral: LUNC, bLUNC, USDC, TERRA

Asset	Multiplier
USDC	1.15
LUNC	1.3333334
bLUNC	1.3333334
USTC	1.3333334
TERRA	2.5

Each type of asset listed above has a different multiplier (ζ) which is multiplied to the minimum collateral ratio of each minted Selenized Asset.

For example, if bLUNC, which has a collateral premium of 1.333334, is used as collateral to mint sGOLD, which has a minimum collateral ratio of 150%, then the minimum tolerated collateral ratio for this position will be 1.3333334 × 150 % ≈ 200%. Any price change of either bLUNC or sGOLD which causes collateral ratio drop to below 200% will lead to liquidation auction.

Collateral Ratio

The collateral ratio (C-ratio) is simply the ratio of the value of a CDP's locked collateral to the value of its current minted tokens.

The CDP is required to always maintain a C-ratio above the position's minimum, otherwise the protocol will initiate a margin call to liquidate collateral. The protocol is able to determine whether a position is underneath the required threshold by re-denominating all Selenized Assets values into USTC via their oracle-reported prices.

Let the Selenized Asset's minimum C-ratio and collateral's multiplier be each r_{min} and ζ. Given a CDP's current quantities of collateral and minted Selenized Asset Q_c, Q_m and their current prices P_c, P_m the effective collateral ratio at any time tt is:

$$r_t = \frac{P_m Q_m}{P_c Q_c}$$

A CDP should strive to always maintain r_t ≥ ζ r_{min}, otherwise the collateral will be subject to liquidation.

Opening a new position

Users are allowed to set the initial C-ratio for their CDPs as long as it meets or exceeds the mandated minimum value for each position. The selection of the initial C-ratio R_0 ​ along with the choice of collateral is used to determine how many tokens are minted during the creation of a CDP.

$$Q_m = \frac{r_0 P_m}{P_c Q_c}$$

Depositing / withdrawing collateral to position

With an existing CDP, the user can deposit additional collateral Q'c to raise its effective C-ratio. The total amount of potential mintable Selenized Assets tokens is then increased by the marginal value Q'm​.

Q'c can be negative, which is equivalent to withdrawing collateral. The user can only withdraw up to however much is needed to maintain the Selenized asset's effective C-ratio above the ζ r_{min}. The user will receive Q_{c} - fee protocol upon withdrawal due to the protocol fee.

$$( Q_m + Q_{m}) = \frac{\zeta r_{\text{min}} P_m}{P_c (Q_c + Q_{c}')}$$

Minting / Burning Selenized Assets

In addition to depositing and withdrawal collateral, the user can also mint and burn Selenized Asset against the CDP to adjust the value of their CDP's effective C-ratio.

Let the quantity of newly minted tokens be Q'm​(negative if burned). The minimum collateral required to keep the CDP position above the Selenized asset's min. collateral ratio is:

$$( Q_c \geq \frac{P_c \zeta r_{\text{min}} P_m (Q_m + Q_{m}')}{Pc} \$$

Anything above that amount can be withdrawn from the CDP.

Closing a position

If a user wishes to collect all their collateral from their CDP, they must close their position by returning the outstanding balance of minted Selenized Asset, which the protocol will burn. A user must first hold the corresponding amount of Selenized Asset to close CDP. The user will then be able to withdraw their locked collateral minus the protocol fee.

Selenium Protocol Fee

2.5% is charged whenever a withdrawal from a CDP is made (including position closure and liquidation auction). The protocol fee is calculated based on the value of the Selenized Asset at the burning of minted asset. This fee is then sent to the Collector contract, converted into SELE through Terraport and distributed.

Margin Call & Auction

Maintaining a lower C-ratio allows users to mint more Selenized Assets tokens for less collateral, but obviously does not come without its risks. A CDP can be margin called when it falls below the min. collateral ratio. At this stage, if the owner does not quickly act and deposit more collateral or burn Selenized Assets to deleverage their position, other users may purchase their CDP's collateral at a discount.

The protocol will try to raise the CDP's C-ratio by burning Selenized Asset it recovers from liquidating its collateral. Let a be the amount of the Selenized Asset paid (up to the amount minted by the CDP) and d be the Selenized Asset's auction discount rate. The buyer can expect to receive:

$$( \min\left( \frac{a}{1 - d} \times \frac{P_m}{P_c}, Q_c\right)$$

The remainder of the collateral not sold is returned to the CDP's owner.

The auction process continues until either the CDP's C-ratio is restored to a level above the Selenized Asset 's minimum collateral ratio or the quantity of minted Selenized Assets is completely burned, which closes the position. Because this provides almost risk-free profit, participants are incentivized to liquidate the entire margin-called position when possible to maximize their profits.

Example:

To illustrate, let sXXX be priced at 1 USTC, and sYYY at 2 USTC. Assume that both assets have a min. collateral ratio of 150% and an auction discount rate of 20%. A user has opened a CDP to mint 100 sXXX at the C-ratio of 150%, depositing 75 sYYY as collateral.

If the CDP is being liquidated with the auction participant paying 100 sXXX to totally liquidate the position, one should receive:

$$\min\left( \frac{100sXXX}{1 - \text{0.2}} \times \frac{1 \text{ USTC/sXXX} \text{}}{2 \text{ USTC/} \text{sYYY}}, 75sYYY \right)$$

Working over the math, one should receive 62.5 sYYY tokens, totaling 125 USTC, making a 25% profit. The CDP owner would receive the remaining 12.5 sYYY.

Note that the owner would still retain his 100 sXXX, meaning along with the 12.5 sYYY they would keep around 125 USTC of value out of their initial 150 USTC deposit.

To avoid liquidation, users should aim for a C-ratio that factors in the known price dynamics of the reflected asset. A safety buffer of at least 50% above the Selenized Asset's minimum is usually recommended. Users with open positions should actively monitor price activity that threaten the safety of their CDP and respond accordingly either by burning Selenized Assets (or closing the position altogether), or deposit more collateral to reduce the possibility of liquidation.