Positive interest charged on borrows is split between reserves and those who lend Hue back to the protocol at a ratio determined by the community. Reserves are used to pay off undercollateralized protocol debt. When reserves exceed a certain portion of total debt, anyone can create a surplus auction.
In a surplus auction, TCP sells a fixed amount of Hue from reserves for an increasing amount of TCP which is burned. TCP thereby decreases excess reserves held by the protocol and accrues them to the TCP token.
Reserves decrease when they are used to pay off undercollateralized system debt. If reserves get too low or are insufficient for paying off undercollateralized debt, anyone can create a deficit auction.
Deficit auctions sell a decreasing amount of newly minted TCP for a fixed amount of Hue. The Hue proceeds are added to reserves in order to ensure there is a buffer of value the protocol can use to pay off undercollateralized debt if the value of Eth rapidly decreases.
Liquidity Position Liquidations
Auctions (this page)