# OnVault Stability Mechanism

### Core Components of the Stability Mechanism

1. **Collateralization Requirements**
   * The system is always over-collateralized. Users must maintain a collateralization ratio (CR) above the minimum threshold to avoid liquidation.
   * Minimum Collateralization Ratio (MCR): **110%**
   * Critical Collateralization Ratio (CCR): **125%**
2. **Vaults and Collateral Management**
   * Each user’s collateralized debt position (CDP) is referred to as a **Vault**.
   * The system calculates the **Individual Collateralization Ratio (ICR)** for each Vault to monitor its health.
   * A Vault becomes **undercollateralized** when its ICR falls below the MCR and is subject to liquidation.
3. **Liquidation Mechanism**\
   Liquidation occurs when a Vault fails to meet the MCR, redistributing its collateral to ensure system stability.\
   The process differs based on the system's total collateralization ratio (TCR):
   * **Normal Mode (TCR ≥ 125%)**
     * Undercollateralized Vaults are redistributed to active Vaults.
   * **Recovery Mode (TCR < 125%)**
     * Liquidation conditions are relaxed to encourage collateral top-ups and debt repayments.
     * Vaults with ICR ≥ TCR are left unaffected, while those with ICR < MCR are liquidated and partially offset.
4. **Gas Compensation**\
   Liquidators receive compensation to cover gas costs and incentivize prompt action. This compensation consists of a fixed amount of **200 USDAO** and **0.5% of the collateral** from each liquidated Vault.
5. **Recovery Mode**\
   Recovery Mode ensures the system’s long-term stability by imposing stricter rules on borrowing and incentivizing corrective actions:
   * New USDAO issuance is restricted unless it improves the Vault’s ICR or maintains the TCR above 125%.
   * Recovery Mode acts as a deterrent, guiding the system away from high-risk states.
6. **Redistribution of Liquidation Gains**
   * Collateral and debt from liquidated Vaults are proportionally redistributed to active Vaults with a collateralization ratio above 110%.
   * Redistribution is designed to preserve Vault ordering by ICR, ensuring system integrity over time.
7. **Corrected Stake Mechanism**

   * To ensure fair redistribution rewards, a corrected stake mechanism is used.
   * It adjusts a Vault’s stake based on its collateral and system-wide snapshots, preventing new Vaults from gaining an unfair share of rewards.

   The **OnVault Stability Mechanism** is the backbone of OnVault’s risk management and stability. By enforcing collateralization requirements, managing liquidations efficiently, and incentivizing corrective behaviors, it ensures the system remains stable and reliable under all conditions.