# What Actually Happens When a Bitcoin Vault Gets Liquidated: Inside Money Protocol's Stability Pool *The most misunderstood part of Bitcoin-backed borrowing is what happens at the exact moment a loan goes underwater. No margin-call phone tree, no bank seizing your coins by hand — just a stability pool doing its job in a single transaction. Here's the mechanism, start to finish.* --- Ask most people how a crypto loan gets "liquidated" and you'll hear a vague picture of an exchange selling your collateral in a panic, dumping it on the open market at the worst possible moment, and maybe coming after you for the shortfall. That's roughly how leveraged trading and centralized lenders work. It is *not* how [Money Protocol](https://www.moneyprotocol.co/) works, and the difference is the whole point. When you borrow against Bitcoin at 0% interest through Money Protocol, liquidation is not a fire sale run by a desk. It's a piece of code that settles in one step, funded by a mechanism called the **stability pool**. Understanding that mechanism tells you more about whether the system is safe than any marketing line ever could — so let's open it up. ## First, a quick refresher on the vault A **vault** is your individual borrowing position. You lock **RBTC** — Bitcoin on the Rootstock network — into a smart contract, and against it you mint **BPD**, the protocol's dollar-pegged stablecoin. The BPD isn't lent to you by a depositor; it's created against your collateral when you borrow and destroyed when you repay. Your vault's health is a single number: the **collateral ratio**, or the dollar value of your RBTC divided by your BPD debt. Lock $30,000 of RBTC, mint 10,000 BPD, and you're at 300%. Because your debt is fixed in dollars while your collateral floats with the Bitcoin price, that ratio moves every time BTC moves. Liquidation is simply what the protocol does when that number falls too far. ## The trigger: 110% Every vault has a floor — a **minimum collateral ratio of 110%**. Cross below it, and your vault becomes eligible for liquidation. Notice how much headroom that leaves. At 110%, the collateral locked in your vault is still worth *more* than the debt it secures — $1.10 of Bitcoin for every $1 of BPD. That is the deliberate design choice that makes the rest of the machine work: the protocol never waits until a position is underwater to act. It steps in while the collateral still exceeds the debt, which means bad positions can be cleared without the system taking a loss. The trigger is a published, code-enforced rule applied identically to every vault. No risk officer decides your fate on a Friday afternoon; no one negotiates a workout. The line is the line. ## The moment of liquidation: enter the stability pool Here's the question the refresher raises and most explainers dodge: when your vault is liquidated, *who actually absorbs the debt?* Someone has to cancel that 10,000 BPD. Where does it come from? The answer is the **stability pool** — the beating heart of the whole system. The stability pool is a communal reserve of BPD that other users deposit voluntarily. When a vault falls below 110% and gets liquidated, the protocol does two things in the same transaction: 1. It **burns an equivalent amount of BPD from the stability pool** to cancel the liquidated vault's debt. 2. It **sends that vault's RBTC collateral to the stability pool**, distributed proportionally among everyone who deposited. That's it. The bad debt disappears, absorbed by the pool. There is no auction, no open-market sell order, no counterparty scrambling to hedge. The whole thing clears atomically inside one block. ## Why anyone deposits into the pool At a glance, being a stability-pool depositor sounds like volunteering to eat someone else's losses. It's the opposite, and the reason is that 110% floor. Because liquidations happen while the collateral is still worth about $1.10 for every $1 of debt cancelled, depositors come out ahead. Suppose the pool burns 10,000 BPD to clear a vault and receives RBTC worth $10,800 in return. The pool just spent $10,000 of stablecoin and received $10,800 of Bitcoin — an $800 gain, paid in BTC, split among depositors in proportion to their share. In other words, stability-pool depositors are effectively **buying liquidated Bitcoin at a discount to market**, and the discount is structurally baked in by the 110% threshold. Their deposited BPD slowly converts into RBTC over time as liquidations occur, ideally at a premium. That's the incentive that keeps the pool funded, and a funded pool is what makes instant, auction-free liquidation possible. The mechanism pays for itself. ## What happens if the pool ever runs dry A fair question: what if liquidations exceed the BPD sitting in the stability pool? The protocol has a fallback called **redistribution**. If the pool can't fully absorb a liquidated vault, the remaining debt and collateral are redistributed across all other active vaults, in proportion to their collateral. Borrowers with the healthiest, most over-collateralized vaults take on a small slice of both the debt and the offsetting collateral. It's a second line of defense that guarantees the system stays solvent even in the rare case the pool is exhausted — the debt is never left unbacked, and it never lands on an outside bailout. ## Recovery Mode: the system-wide version Everything above concerns a single vault crossing 110%. There's also a **system-wide** safeguard tied to a second threshold: **150%**. If the *total* collateral ratio across every vault in the protocol falls below 150% — the kind of thing that happens in a violent, market-wide Bitcoin drawdown — the protocol enters **Recovery Mode**. In this state the rules tighten for everyone: vaults below 150% (not just below 110%) can be liquidated to pull the whole system back to health quickly. The practical lesson for a borrower is simple and worth internalizing: in a real crash, the genuinely safe collateral ratio is not a hair above 110%. It's comfortably north of 150%, because the protocol can raise the bar for the entire system at once precisely when markets are most stressed. ## Why this beats a fire sale Step back and compare the two models. A centralized lender or a leveraged exchange liquidates by selling your collateral into the open market. That selling adds downward pressure exactly when prices are already falling, which triggers more liquidations, which adds more selling — the cascade that has vaporized accounts in every major crypto crash. Money Protocol's stability pool severs that feedback loop. Liquidated Bitcoin doesn't hit the order book; it moves sideways into the pool and is held by depositors who *wanted* to accumulate BTC at a discount. Debt is cleared against a pre-funded reserve rather than a frantic market sale. The system de-risks itself without amplifying the very move that caused the stress. And because the entire process is enforced by public code, every rule here — the 110% floor, the 150% Recovery Mode threshold, the pool distribution math — is the same for everyone and can't be quietly changed by an insider when it's inconvenient. ## The takeaway Liquidation is the stress test of any lending system, and it's where the difference between "trust us" finance and code-enforced finance becomes concrete. In Money Protocol, a liquidation is a single, self-funding transaction: the stability pool cancels the debt, absorbs the collateral at a built-in discount, and — with redistribution behind it and Recovery Mode above it — keeps the protocol solvent without a bailout or a fire sale. If you want to understand the machine before you trust it with your coins, the stability pool is the piece to study. It's the reason a self-custodial system can offer to **[borrow against Bitcoin at 0% interest](https://www.moneyprotocol.co/)** and still stay standing when the market doesn't cooperate. *Money Protocol is a decentralized, self-custodial protocol for borrowing against Bitcoin at 0% interest. Learn more at [moneyprotocol.co](https://www.moneyprotocol.co/) or read the [documentation](https://docs.moneyprotocol.co/).*