The Stability Pool is the first line of defense in maintaining system solvency. In the case of Liquity Protocol, LUSD holders commit capital upfront to the Stability Pool in order to “buy” liquidated ETH and offset bad debt. During a liquidation event, LUSD is taken from the Stability Pool and used to pay off an undercollateralized loan. The ETH collateral in the Vault is distributed proportionally amongst stability providers.
