The Safety Pool is the first method FxDAO uses to keep the protocol healthy. When a Vault gets below the minimum collateral ratio allowed, the pool automatically liquidates the Vault by redeeming all of the collateral and using the funds of the pool to pay back the debt.
Why should I provide liquidity on the Safety Pool?
There are two benefits for liquidity providers to the Safety Pool:
One of the ways to earn the protocol's token is by providing liquidity to the Safety Pool, the more you provide, the bigger the size of the daily rewards that will go to your account.
Since a liquidation normally occurs at a rate between 100%* and 110%*, it means liquidity providers earn between 0 and 5%* of the debt liquidated in terms of the collateral as the Safety Pool shares 50%* of the profits in the liquidation process.
How is the protocol's token distributed across participants?
Liquidity providers for the Safety Pool who have been there without withdrawing funds for a period of 48hrs* will receive rewards daily, the number of rewards distributed across the participants is determined by the current options to earn the protocol's token.
For example, if the protocol currently has two options to earn the protocol's token (learn more about daily distribution here) we can calculate it this way:
AD = Amount deposited = $15,000
PL = Pool Liquidity = $2,400,000
DR = Daily rewards = 32,876
CO = Current options = 2
(DR / CO) * (AD / PL) = Total of rewards = 102.7375
How much will I benefit from liquidated Vaults?
A Vault liquidation occurs when the Vault's collateral ratio falls below the Minimal Collateral Ratio, at this point, the Vault enters into Liquidation and it starts the race between external participants (the liquidation process is open to everybody on the network) and the Safety Pool. If the Safety Pool is the one who liquidates the Vault, 50% of the value above the minimum amount to pay back the debt will go to those providing liquidity in the Safety Pool, for example:
AD = Amount deposited = $50,000
PL = Pool Liquidity = $200,000
CP = Collateral price = $USD 0.09331
DV = Debt Value = $USD 100,000
CD = Collateral deposited = $XLM 1,173,336.8741
CN = DV / CP = Collateral needed = $XLM 1,071,696.496
SRP = Share rate = 0.5
AU = AD * (AD / PL) = Amount used to pay the debt = $12,500
CR = CN * (AU / DV) = Collateral received = $XLM 133,962.062
PR = ((CD - CN) * SR) * (AD / PL) = Profit received = $XLM 12,705.04726
TC = CR + PR = Total collateral received = $XLM 146,667.1093
TC * CP = Collateral received in terms of stablecoin deposited = $13,685.50797
Total profit = $13,685.50797 - $12,500 = $1,185.50797
The example above is a case where there is a total of $200,000 deposited into the Safety Pool and your deposit was $50,000. There is a vault that fell below the Minimum Collateral Ratio so it went into the liquidation process, because the debt was $100,000 the same amount was withdrawn from the Safety Pool (from that amount $12,500 were from your deposit).
The total collateral collected at the liquidation moment was $XLM 1,173,336.8741, where $XLM 1,071,696.496 is the amount equivalent to the debt, from this amount you will get the equivalent to $12,500 ($XLM 133,962.062). The liquidation profit is divided following the Share Rate and from there you receive the profits based on the amount you deposited into the protocol: $XLM 12,705.04726 (which is valued at $1,185.50796).
As you can see you end up with a lower position in your deposit, but you received more value in collateral funds. From here you can do whatever you want with the collateral (exchange it, create a Vault with it, etc).
Is there a locking period?
No, you can withdraw your deposit at any time as long as no Vaults are waiting for liquidations (Vaults under the minimum requirement). Also, keep in mind that the protocol's token is distributed to liquidity providers who haven't withdrawn from the Safety Pool during a period of 48hrs*.
What are the risks involved with the Safety Pool?
If there is a major flash crash in the market, it's possible that a Vault gets liquidated below 100% of the collateral ratio, this means that you will end up with less value after a Liquidation happened. The Minimum Collateral Ratio is set up with the target to avoid such situations.