Recovery mode

What is Recovery Mode?

The core principle of Vaultedge is to ensure that USDVE remains fully overcollateralized and always redeemable. While the protocol allows for capital-efficient borrowing using low collateral ratios, stability must be maintained by balancing these positions with safer, overcollateralized ones. This balance is preserved through the activation of Recovery Mode, which operates independently per collateral type.

When is Recovery Mode activated?

Recovery Mode is triggered per collateral asset when that collateral’s market-wide Collateral Ratio (CR) falls below its Critical Collateral Ratio (CCR).

• Example: If the CR for wstETH drops below its defined CCR, only the wstETH market enters Recovery Mode. All other collateral types continue operating normally.

Recovery Mode ends for that collateral once its CR returns above the CCR.

What happens in Recovery Mode?

When Recovery Mode is active for a collateral:

• Vaults with Individual Collateral Ratio (ICR) below the collateral’s current CR become eligible for full liquidation.

  • 100% of their collateral is liquidated.

  • The debt is canceled by the Stability Pool.

• Borrower actions are restricted to prevent further deterioration of the collateral’s CR:

  • New vaults can only be opened if the ICR is at or above the CCR.

  • Existing vaults can only mint more USDVE if the resulting ICR remains at or above the CCR.

  • Collateral top-ups and debt repayments are always allowed.

Why does Recovery Mode matter?

Recovery Mode acts as a fail-safe to preserve USDVE solvency and redeemability under stress. It encourages borrowers to proactively manage risk and incentivizes Stability Providers to step in and absorb bad debt in exchange for discounted collateral.

Economically, Recovery Mode promotes collateral top-ups and debt repayments, while its mere existence serves as a self-correcting deterrent. The threat of entering Recovery Mode discourages excessive leverage and helps guide the system away from instability.

Although Recovery Mode is not an ideal state, it is a critical backstop that ensures Vaultedge remains safe, overcollateralized, and functional even in extreme market conditions.

Condition	Liquidation Behavior
ICR =< CR & SP USDVE > vault debt	USDVE in the Stability Pool is offset with the Vault's debt. The vault's collateral (minus ETH gas compensation) is shared between stability pool depositors.
MLR < ICR < CR & SP USDVE < vault debt	Partial liquidation. The portion of the debt that can be covered by the Stability Pool is offset. Corresponding fraction of collateral is distributed to stability providers. Remaining debt and collateral are redistributed to active vaults.
CR < ICR <= MCR & SP USDVE ≥ Vault's debt	The Stability Pool USDVE is used to offset an equal amount of debt from the Vault. A portion of the Vault’s collateral, valued at up to 110 percent of the repaid debt, is distributed to Stability Pool depositors. No collateral or debt is redistributed to other Vaults. If the Vault's ICR was higher than the liquidation threshold, any remaining collateral is sent to the Collateral Surplus Pool and becomes claimable by the borrower. The Vault is then closed.
MCR < ICR < CR & SP USDVE < Vault's debt	Do nothing.
ICR >= CR	Do nothing.

A good rule of thumb is to keep your vault’s ICR above both the MLR and the MCR during Recovery Mode. It is also advisable to monitor the TCR to avoid liquidation risk.

For Vaults opened with exempt collateral types, Vaultedge does not apply liquidation or redemption mechanisms. This means that Stability Providers will not receive any of that collateral during liquidations, as it cannot be liquidated or redeemed.

It is important to note that, by design, all smart contract interactions within Vaultedge assume the value of 1 USDVE to be exactly 1 USD.

However, this does not guarantee that USDVE will always trade at exactly 1 USD on decentralized or centralized exchanges. The market price of USDVE may fluctuate above or below peg. Users should understand these dynamics thoroughly before interacting with the Vaultedge protocol.