Collateral Risk
Liquidation can be caused by the mismatch in jitoSOL and SOL prices
Last updated
Liquidation can be caused by the mismatch in jitoSOL and SOL prices
Last updated
USS/eUSS use jitoSOL as the collateral for SOL short positions. A drastic drop of jitoSOL value relative to SOL might degrade the value of the collataral and reduce short positions' equity below maintenance margin requirement. For example, if there is an extraordinary increase in SOL price while jitoSOL price does not increase, the protocol might get margin called. If the gap is too big, the protocol cannot rebalance long and short positions, and the protocol is forced to realize loss.
Data suggests such an event has never happened and the chance of it happens is extremely more because the gap between jitoSOL and SOL value is very small and tend to disappear in the long terms. This, couples with the protocol not using any leverage, makes the liquidition risk extremely small.
In the past three years, the largest price discrepancy between jitoSOL and SOL has been -15%. This mismatch is insufficient to trigger a margin call on our positions, showing that the value of the staked jitoSOL collateral does not diverge significantly from the value of the short position. It remains well within safe limits, avoiding any risk of liquidation or let alone losses that could activate the protocol's safety mechanisms.
As jitoSOL market cap grew, especially from H2 2023 until now, the price mismatch between the two tokens significantly reduced. This is expected as the jitoSOL market became deeper, it also became less volatile and followed SOL price closely. We expect the gap between jitoSOL and SOL will continue to close, further minimize liquidation risk on the protocol.
Data shows jitoSOL's value is more than 1% lower than SOL's value on only ~7% of trading days. This shows jitoSOL and SOL value difference stays within 1% range 93-95% of the time.
Even if there is a value mismatch between SOL and jitoSOL, the gap is quickly fixed. As time goes on, arbitrageurs will take advantage of any discrepancy between the two market, thus bringing jitoSOL and SOL value back together quickly.
While mismatch larger than 1% can exist for on 5% of trading days, it almost does not exist (less than 3%) for longer than 3 days, let alone 7 days.
Our risk management team always monitor jitoSOL/SOL price closely. Additionally, the protocol has a safety switch that would start gradually liquidating our positions once the one-day gap in value of the two tokens exceed -20%, which has never happened and we deem extremely unlikely.
