Smooth Arbitrage Liquidation Mechanism for Cryptocurrency

The QIAN system will decide whether to switch on the arbitrage mechanism based on the value of VolR. The system encourages liquidation under low market volatility to mitigate the impact of short-term panic sentiment on the stability of the QIAN system.

At t(i) moment, Qi,tmay have the following several CSA states in the QIAN system:

Ÿ Normal contract, Qi,t>Qi,alarm

Ÿ Alarming contract, Qi,min<Qi,t≤ Qi,alarm

Ÿ Frozen contract, Qi,t≤ Qi,min

For arbitrageurs who do not hold CSA, their redemption may cause a reduction in the locked assets of CSA holders. For fairness and efficiency, the source of thecallableassets for participants insmooth arbitrage liquidation at t(i) moment will be limited to CSA (frozen).

During the arbitrage, arbitrageurs will do arbitrage fromallfrozen assets of reserve asset i. Assuming that at moment t, there are 100 frozen CSA in the QIAN system, which generate a total of 100,000 QIAN. Now, arbitrageurs can use less than 100,000 QIAN of liquidation funds, to obtain all or partial frozen assets from the liquidation contract, statingfrom high investment offersto low. During the liquidation, all CSA (frozen) holders will share the loss proportionally to the percentage of their frozen assets in the total frozen CSA.

All reserve assets in CSA (frozen) are available for redemption by arbitrageurs. In order to prevent losses, CSA (frozen) holders must cover the margin call first to remove their assets from being frozen. Both the operations of arbitrageurs’ redemption and CSA (frozen) holders’ covering the margin call, will efficiently improve the adequacy ratio of QIAN, making the value of QIAN return to normal as soon as possible when the reserve asset is insufficient.

The design of this liquidation mechanism is not only able to encourage CSA (frozen) holders to coverthe margin call, but also smooth the liquidation speed and quantity, while slowing down and reducing the losses suffered by individual users as much as possible. Therefore, this mechanism is named as smooth arbitrage liquidation.

The smooth arbitrage liquidation mechanism becomes complicated when the QIAN system supports multiple cryptocurrencies. In theory, arbitrageurs can redeem any asset that meets the liquidation conditions in the system, and there is no liquidating sequence among the reserve assets. The system displays the callableamount of each asset in a dynamic and real time manner. Arbitrageurs will conduct redemption within the limits, and the distribution of crypto assets throughout the system will not be significantly changed.

The callableamount of various assets is always in dynamic change. When the staked asset i reaches the maximum callableratio Ri, the overall reserve adequacy ratio of the system is objectively improved, and the arbitrage will be paused due to the limit. QIAN is a multi-collateral systemand arbitrage on other assets will not be affected.