Slashing Mechanism

📌 Slashing & Liquidation Logic (Definition + Technical Breakdown)

Definition: In Centuari’s underwriting framework, when an operator fails to fulfill repayment obligations on an open lending position, the system initiates a structured liquidation sequence based on a predefined liquidity preference tier. This determines the order in which an operator's restaked assets are liquidated, prioritizing highly liquid, low-risk assets before moving to lower-liquidity, higher-risk assets.

Example: If an operator’s collateral portfolio includes stETH, rETH, and EIGEN, the system would liquidate stETH first due to its superior liquidity and tighter market depth, followed by rETH, and finally EIGEN.

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📌 Technical Mechanics Behind the Process:

• Upon a default event (loan maturity exceeded without repayment), the system queries the Virtual Collateral Pool (VCP) to retrieve the operator’s locked assets and their associated Risk-Adjusted Value (RAV).

• Each asset in the portfolio is tagged with:

  • Liquidity Score (based on on-chain DEX reserve data and oracle-sourced volatility)

  • Risk Weight (defined via governance Risk Table)

• The system arranges these assets into a liquidity preference tier:

  • Tier 1 → High-liquidity LSTs (e.g., stETH)

  • Tier 2 → Mid-liquidity LSTs (e.g., rETH)

  • Tier 3 → Native governance or exotic tokens (e.g., EIGEN)

• Liquidation proceeds sequentially:

  1. The system attempts to liquidate Tier 1 assets by selling them to market takers via on-chain AMM or CLOB market, using either direct swap or liquidation orderbook.

  2. If debt coverage remains insufficient, Tier 2 assets are liquidated next.

  3. This process continues down the tier list until the defaulted position is fully covered or all collateral is exhausted.

• Fallback Handling: If no market exists for the lowest-tier assets or if slippage risk exceeds acceptable limits (as defined in protocol parameters), liquidation halts, and the deficit is flagged to governance for treasury intervention or secondary liquidation rounds.

• On-chain Recording: Every liquidation transaction, asset tier selection, and price feed used for valuation is immutably logged to the Audit Log Contract for public verification and dispute resolution.

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📌 Why This Matters:

This mechanism:

• Protects market stability by prioritizing liquid asset liquidation.

• Prevents cascading failures from illiquid collateral dumps.

• Ensures fairness among operators by enforcing an impartial liquidation rule set.

• Mirrors proven mechanisms in decentralized restaking security networks while remaining fully sovereign and modular within Centuari’s infrastructure.