Normal Mode

Overview of Normal Mode

Normal Mode is the default operating state of the USDAO Borrowing Protocol when the Total Collateralization Ratio (TCR) is greater than or equal to 125%. In this mode, the system focuses on maintaining stability and protecting the collateral deposited by borrowers.

The system operations in Normal Mode primarily aim to ensure that each Vault’s Individual Collateralization Ratio (ICR) remains above the Minimum Collateralization Ratio (MCR) of 110%. If a Vault falls below this threshold, it becomes eligible for liquidation.

Liquidation in Normal Mode

Liquidation in Normal Mode follows a straightforward set of rules:

Conditions and Behavior

Condition	Liquidation Behavior
ICR < MCR (ICR < 110%)	The Vault is considered under-collateralized. Its debt and collateral (minus gas compensation) are redistributed to active Vaults.
ICR ≥ MCR (ICR ≥ 110%)	The Vault remains safe and no liquidation occurs.

Liquidation Process

1. Liquidation Trigger: Any Vault with an ICR below the 110% MCR becomes eligible for liquidation.

2. Debt and Collateral Redistribution: The debt and collateral from the liquidated Vault are redistributed to active Vaults proportionally, helping to maintain the system’s overall health.

3. Gas Compensation: A small portion of collateral (0.5%) and 200 USDAO are taken as gas compensation to incentivize liquidators.

Key Features of Normal Mode

1. Collateral Stability: Borrowers must maintain an ICR above 110% to avoid liquidation.

2. Open Borrowing: Users can borrow USDAO freely as long as their Vault’s ICR remains above 110%.

3. Efficient Liquidation Process: Liquidators are incentivized to promptly liquidate under-collateralized Vaults through a combination of USDAO and RP compensation.

4. Redistribution Mechanism: Liquidated debt and collateral are distributed to active Vaults proportionally, preserving the overall system balance.