💙Recovery Mode
What is the Total Collateral Ratio?
The Total Collateral Ratio or TCR is the ratio of the Dollar value of the entire system collateral, to the entire system debt. In other words, it's the sum of the collateral of all Vaults expressed in USD, divided by the debt of all Vaults expressed in GAI.
What is Recovery Mode?
Recovery Mode kicks in when the Total Collateral Ratio (TCR) of the system falls below a certain threshold (i.e. 150% for ETH).
During Recovery Mode, Vaults with a collateral ratio below recovery mode threshold can be liquidated. Moreover, the system blocks borrower transactions that would further decrease the TCR. New GAI may only be issued by adjusting existing Vaults in a way that improves their collateral ratio, or by opening a new Vault with a collateral ratio larger than recovery mode threshold. In general, if an existing Vault's adjustment reduces its collateral ratio, the transaction is only executed if the resulting TCR is above recovery mode threshold.
What is the purpose of Recovery Mode?
The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly raise the TCR back above a certain threshold (i.e. 150% for ETH), and to incentivize GAI holders to replenish the Stability Pool.
Economically, Recovery Mode is designed to encourage collateral top-ups and debt repayments, and also itself acts as a self-negating deterrent: the possibility of it occurring actually guides the system away from ever reaching it. Recovery Mode is not a desirable state for the system.
What are the fees during Recovery Mode?
While Recovery Mode has no impact on the redemption fee, the borrowing fee is set to 0% to maximally encourage borrowing (within the limits described above).
How can I make my Vault safe in Recovery Mode?
By increasing your collateral ratio to 150% or greater, your Vault will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.
Can I be liquidated if my collateral ratio is below 150% in Recovery Mode?
Yes, you can be liquidated below 150% if your Vault's collateral ratio is smaller than 150%. In order to avoid liquidation in Normal Mode and Recovery Mode, a user should keep their collateral ratio above 150%.
How do liquidations work in Recovery Mode?
Take ETH as a collateral example with recovery mode threshold 150%.
ICR = Individual Collateral Ratio
MCR = Minimum Collateral Ratio
TCR = Total Collateral Ratio
SP = Stability Pool
ICR <=100%
Redistribute all debt and collateral (minus gas compensation) to active Vaults.
100% < ICR < MCR & SP GAI > Vault debt
GAI in the Stability Pool equal to the Vault's debt is offset with the Vault's debt. The Vault's collateral (minus gas compensation) is shared between depositors.
100% < ICR < MCR & SP GAI < Vault debt
The total Stability Pool GAI is offset with an equal amount of debt from the Vault. A fraction of the Vault's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors. The remaining debt and collateral (minus gas compensation) is redistributed to active Vaults.
MCR <= ICR < 150% & SP GAI >= Vault debt
The Stability Pool GAI is offset with an equal amount of debt from the Vault. A fraction of collateral with dollar value equal to MCR * debt is shared between depositors. Nothing is redistributed to other active Vaults. Since its ICR was >= MCR, the Vault has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Vault is closed.
MCR <= ICR < 150% & SP GAI < Vault debt
Do nothing.
ICR >= 150%
Do nothing.
How much of a Vault's collateral can be liquidated in Recovery Mode?
In Recovery Mode, liquidation loss is capped at MCR of a Vault's collateral. Any remainder, i.e. the collateral above MCR (and below the TCR), can be reclaimed by the liquidated borrower using the standard web interface.
This means that a borrower will face the same liquidation “penalty” (MCR - 100%) in Recovery Mode as in Normal Mode if their Vault gets liquidated.
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