How it works?

Once a user has created a vault and deposited some MINA inside they are eligible to create some new zkUSD. In order to do that, they need to provide a valid price. The price needs to be provided in the form of a zk-proof that is generated by collecting and processing the prices published by the oracles trusted oracles.

For convenience, if a user uses the Fizk frontend, price proofs are automatically generated and submitted a long with the vault interaction. If a user wants to interact outside of the frontend, they will have to generate the price themselves

Using the valid price the system ensures that the vault will be sufficiently collateralised after the zkUSD has been created, and, as long as that is true, the new zkUSD is created.

If the user wants to take back the collateral that they have locked in the vault, they must first pay back the zkUSD that they borrowed. In reality, when the zkUSD is paid back, it is burnt and removed from the overall supply. This ensures the supply is effectively managed to ensure that we also have the collateral in the system backing the debt.

Over-collaterlisation Ratio

The protocol enforces over-collaterlisation through a parameter called the over-collaterlisation ratio. This is the ratio of value locked to what can be created. At the protocols inception, this was set to $150 \%$. This means that in order for me to be able to mint 100ƶk, I would need to have $150 worth of collateral locked inside my vault at the very least.

However, holding the bare minimum would not be a wise move. The protocol self-regulates its financial health by opening up vaults that fall under the ratio to liquidation.

Lets say that MINA is worth $1 and I have deposited 150 MINA to mint 100ƶk. Then a drop in the MINA price occurs and now it is worth $0.90. Now my collateral is worth $135, which is only $135\%$ over-collateralised. Now my vault is open to liquidation and anyone can come and pay back the 100ƶk on my behalf and get access to the collateral locked inside.

Liquidations

Once a vault falls below the liquidation threshold, anyone with a sufficent amount of zkUSD can liquidate it. This involves paying back the outstanding zkUSD of the vault, and receiving the value of the zkUSD back in collateral plus a liquidation bonus to reward them for proactively maintaining the financial health of the protocol. Initially the liquidation bonus is set to $10\%$. The remaining collateral is sent to the vault owner.

We can illustrate this if we take the above example. Let's say Alice comes a long and wants to now liquidate my vault. She will pay the 100ƶk and in return get's 111 MINA plus 11 Mina as the liquidation bonus. The remaning 28 MINA will be sent back to me. After liquidation the Vault is completely reset and will contain no collateral and have no outstanding debt.