Recovery mode
Last updated
Last updated
The core principle of our system is to ensure that veUSD remains fully over-collateralized and consistently redeemable. While we offer highly capital-efficient loans with low collateralization requirements, safeguarding redeemability in all circumstances necessitates balancing the system with more secure, well-capitalized loans. This equilibrium is maintained through the activation of Recovery Mode.
When the system's Total Collateral Ratio (TCR) drops below 150%, meaning that veUSD isn't as well-collateralized, the system moves into recovery mode.
It goes back into Normal Mode once TCR goes back to above 150%.
During Recovery Mode, vaults with an adjusted individual collateral ratio () below the TCR of the system are eligible to be liquidated.
100% of the collateral in the vault will be liquidated
Additionally, the system restricts borrower actions that could further reduce the Total Collateral Ratio (TCR). New veUSD can only be minted by improving the collateral ratio of existing Vaults or by opening a new Vault with a collateral ratio of at least 150%.
Pure stablecoin vaults are still safe during recovery mode.
Because Recovery Mode uses the Adjusted Collateral Ratio (AICR), Vaults backed entirely by stablecoins are exempt from these conditions due to their higher AICR.
Recovery Mode encourages borrowers to take actions that restore the Total Collateral Ratio (TCR) above 150%. To ensure safety in all conditions, users should maintain their Vault collateral ratio above the TCR and, ideally, above 150%.
This mechanism is designed to promote healthy borrowing practices and act as a deterrent. The mere possibility of Recovery Mode helps steer the system away from triggering it. While not a desirable state, Recovery Mode is a necessary safeguard to uphold the system's stability.
A vault's Adjusted Individual Collateral Ratio or AICR is a ratio between collateral and debt giving additional weight to stablecoins.
This calculation is similar to the Risk-Adjusted Value calculation except with a different ratio for each collateral. Stablecoin collaterals have an Adjusted Safety Ratio of 1.6 while other assets will have System Ratio = Safety Ratio. The idea is that we are comfortable with the full system being backed by low collateral ratio loans against stablecoins. But if veUSD is mostly collateralized by riskier assets, we need a higher dollar value of those assets in the system vs. veUSD issued.
The Total Collateral Ratio (TCR) is a number representing system safety and the value of the system collateral vs. the amount of veUSD minted against it. The system will be in "recovery mode" if the TCR is below 150%. This calculation works like the AICR calculations above.
The goal of Recovery Mode is to encourage borrowers to take actions that swiftly restore the Total Collateral Ratio (TCR) above 150% and motivate veUSD holders to replenish the Stability Pool.
Economically, Recovery Mode incentivizes collateral top-ups and debt repayments, while also serving as a self-correcting deterrent. Its mere possibility helps steer the system away from ever triggering it.
While necessary, Recovery Mode is not an ideal state for the system.
While Recovery Mode has no impact on the soft liquidation fee, the borrowing fee is set to 0% to maximally encourage borrowing (within the limits described above).
By increasing your Adjusted Collateral Ratio to 150% or greater, your vault will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.
150% in Recovery Mode?You can be liquidated in recovery mode if your vault's adjusted collateral ratio is smaller than the TCR. In order to avoid liquidation in Normal Mode and Recovery Mode, a user should keep their vault collateral ratio above 150%.
ICR = Individual Collateral Ratio
MCR = Minimum Collateral Ratio
TCR = Total Collateral Ratio
SP = Stability Pool
Condition
Liquidation Behavior
ICR <=100%
Redistribute all debt and collateral (minus ETH gas compensation) to active vaults.
100% < ICR < MCR & SP veUSD > vault debt
veUSD 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.
100% < ICR < MCR & SP veUSD < vault debt
The total Stability Pool veUSD is offset with an equal amount of debt from the vault. A fraction of the vault collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors.
The remaining debt and collateral (minus ETH gas compensation) is redistributed to active vaults.
MCR <= ICR
& AICR < TCR
& SP veUSD >= Vault debt
In this case, the Stability Pool veUSD is offset with an equal amount of debt from the vault. A fraction of collateral with dollar value equal to 1.1 * debt is shared between depositors.
Nothing is redistributed to other active vaults. Since its ICR was > 1.1, the vault has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The vault is closed.
MCR <= ICR & AICR < 150%
& SP veUSD < Vault debt
Do nothing. Because there is insufficient veUSD in the stability pool to fully offset, this vault is not liquidated
AICR >= 150%
Do nothing.
Liquidated collateral lost is capped at 110% of a vault's debt. Specifically, the dollar value of the collateral sent to the stability pool is a maximum of 110% of the veUSD debt that is offset. Any remainder, i.e. the collateral above 110%, can be reclaimed by the liquidated borrower using the standard web interface.
This means that a borrower will face the same liquidation “penalty” (10%) in Recovery Mode as in Normal Mode if their vault gets liquidated.