How low should bitcoin go before the BPro is liquidated?

Currently, faced with a sudden drop in the price of bitcoin that leaves the DOCs undercollateralized, the protocol is blocked until the price rises again or the MoC holders decide to liquidate the protocol.

It is not possible to know at what price the BPRO will be liquidated, what it is possible to know is at what price it will surely not liquidate. The BPRO is not going to be liquidated as long as the BTC price is higher than the BPRO price divided by the system coverage. But it will probably not be liquidated with that BTC price either, it will be even a little lower.

For example, at current BTC and coverage values ​​(coverage 5.18, price BTC 12266), we know with 100% certainty that the price of the BTC has to be below $ 2367 for the BPRO to be liquidated (12266 / 5.18). Although it cannot be said that it will be liquidated at that value, it is most likely that it will liquidated at a lower price. Generally speaking, for a liquidation to occur, a 90% BTC decline would have to occur, and the decline should be fast enough that the market cannot react.

What would it mean for the market to react, some examples:

  • that users contribute more collateral to the protocol in BPRO (raising the level of coverage again): faced with a sudden and sharp decline in the price of BTC, many bitcoiners may be tempted to take a position in BPRO for the free leverage and the possible gain before a rise in the price of BTC.

  • If the price of the BPRO continues to fall, there is a mechanism already implemented in the protocol that when coverage levels are very low, BPRO can be issued “at a discount”. That mechanism was far from being activated during the crash of March 13 when the price of Bitcoin had the fastest decline in the last 7 years.

  • Faced with a significant drop in the price of BTC, it is possible that other players carry out long leveraged operations in BTCX (lowering the level of leverage of the BPRO). Precisely those new Long BTCX operations are expected to cushion the decline in the price of BPRO by reducing the leverage that is exposed when the price of BTC falls.

  • Faced with a drop in the price of BTC, it is possible that some of the DOC holders redeem their tokens and switch to BTC and or other Stablecoins or USD Fiat. The departure of DoCs from the protocol has a very important effect on increasing coverage levels, removing the possibility of BPRO liquidation.

Here is a more detailed note that explains the robustness of the protocol written by Alejandro Bokser, CTO & Cofounder of Money on Chain: