To ensure that the entire $PXDC supply is always fully backed by collateral, Vaults that fall below the minimum collateral ratio of 110% (known as undercollateralized Vaults) are subject to liquidation.
As mentioned earlier, the Stability Pool is funded by Stability Providers who deposit $PXDC tokens. It primarily functions as a "shock absorber". These $PXDC tokens are used to pay off the $PXDC debt of any liquidated Vault, and in turn receive the $PLSX collateral from the liquidated Vault.
When a Vault becomes undercollateralized below 110% (due to a drop in the $PLSX price), the debt payable within the Vault ($PXDC) can be immediately offset from the $PXDC tokens in the stability pool. Those $PXDC tokens are burned, and $PLSX from the liquidated Vaults is returned to the stability providers.
The system transfers 99.5% of the $PLSX collateral from the liquidated Vaults to the Stability Pool, while paying out the remaining 0.5% to the liquidator.
During liquidations, $PXDC tokens in the Stability Pool are replaced by $PLSX. The $PXDC is burned to cover the liquidated loan and the collateral is awarded to the Stability pool. Collateral transferred to Stability Pool is worth more (in USD) than the burned $PXDC tokens at time of liquidation due to liquidation occuring at or near the 110% point. This results in the Stability Pool receiving more in $PLSX than the $PXDC was worth that was burned.
It is worth noting that since the liquidations contract is a publicly callable function, these are likely to eventually be performed by users running automated bots and scripts. This means that there might not be much of a grace period once a vault falls below the 110% collateralization ratio.
Stability Providers receive shares of the liquidations that occur during the lifetime of their $PXDC deposit in the pool. Due to the system's mechanics, most depositors over time will exit the stability pool with a higher value than their initial deposit, incentivizing Stability Providers to participate in the pool.
It's important to note that when a Vault is liquidated, the borrower's collateral value had fallen to nearly the same value of the $PXDC they already obtained. Liquidation in this system is not the same as a leveraged position like you would see on a central exchange, where both the collateral (margin) and the loan amount are lost.