Submitted by alix40, also found by dimulski, eta, Giorgio, ljj, and zhaojohnson
Bounded Kerosene is not attractive for liquidation. First of all bounded kerosene has twice the value of unbounded kerosene. For example, if 1 Kerosene is worth 10 usd in the unbounded vault then 0.5 Kerosen will be worth the same amount in a bounded vault.
Twice the valuation is justified for users and Liquidity Providers. The problem however, is if we take the perspective of a liquidator. If he liquidates a position that has a significant percentage of the position value in bounded Kerosene Vault. The liquidator will receive the amount locked in the bounded kerosene vault, which he cant withdraw; so the liquidator actually wouldnt be necessary be able to swap the kerosene against stable coins to make a profit, for example. He will also receive half the amount of kerosene if this was an unbounded kerosene Vault. This might not be clear, so we encourage the reader to see the following example to understand the need to rework liquidations for bounded kerosene vaults.
As an example to show the huge disadvantage a liquidator  will face when liquidating bounded kerosene vs unbounded kerosene vs exo collateral (like eth), lets take similar context but with different composition of collateral.
Collateral worth 1.4k and minted dyad is worth 1k usd: -> collRatio = 140 % which is eligible for liquidation. The percentage of coll to seize is 100%+ 40%*20%)/140% => 77.14% of collateral to seize.
For simplicity, lets say 1 unbounded kerosene Token is worth 100 usd and 1 bounded kerosene token is worth 200 usd (twice the asset price) in the vaults as collateral (however, the value of Kerosene outside the vaults in exchanges is gonna be near the 100 usd valuation).
The liquidator needs to pay down 1k dyads (1k usd).
Having twice the value for kerosene if locked, might make sense for Protocol user, this however, will result in problems for liquidators. We recommend the protocol to implement a solution that addresses the following issues:
Context
shafu0x (DYAD) commented:
Koolex (judge) decreased severity to Medium
alix40 (warden) commented:
McToady (warden) commented:
Koolex (judge) commented:
shafu0x (DYAD) acknowledged
Note: For full discussion, see here.
