Recovery Mode

What is Recovery Mode?

Recovery Mode is a critical feature in the USDAO Borrowing Protocol that is activated when the Total Collateralization Ratio (TCR) of the system falls below 125%. Its purpose is to protect the system and incentivize user behavior that helps restore the TCR back above 125%. This mode ensures the long-term stability of the USDAO ecosystem by enforcing stricter rules on borrowers and changing liquidation conditions.

Triggering Recovery Mode

• Condition: Recovery Mode is activated automatically when the system’s TCR falls below the Critical Collateralization Ratio (CCR) of 125%.

• Objective: Encourage borrowers to increase their collateral or reduce their debt to bring the system back to a healthy state.

Behavior in Recovery Mode

In Recovery Mode, the protocol modifies its behavior compared to Normal Mode:

1. Stricter Rules for Borrowers

   • Borrower actions that reduce their Vault’s Individual Collateralization Ratio (ICR) are only allowed if the resulting system TCR remains above 125%.

   • Borrowers can open new Vaults, but only if the new Vault’s ICR is at least 125%.

   • Adjustments to existing Vaults are restricted to actions that maintain or improve the Vault’s ICR.

2. Relaxed Liquidation Conditions

   • Liquidation behavior is adjusted to prioritize reducing systemic risk and restoring the TCR.

   • Liquidation Behavior:

     • ICR < MCR (110%): The debt and collateral (minus compensation for gas costs) are redistributed to active Vaults.

     • MCR ≤ ICR < TCR (125%): The Vault’s debt is offset, and a portion of the collateral equal to 110% of the debt is retained. Any remaining collateral is sent to the CollSurplusPool, where it can be claimed by the borrower.

     • ICR ≥ TCR (125%): No liquidation action is taken.

Incentives for Recovery

The Recovery Mode mechanism is designed to naturally push the system back to a healthy state. It encourages borrowers to:

• Top-up collateral: Increasing their Vault’s collateral to avoid liquidation and improve the system’s overall TCR.

• Repay debt: Reducing the outstanding debt in their Vault to increase the ICR.

By aligning incentives with the protocol’s stability, Recovery Mode ensures that users work together to maintain the integrity of the system.

Economic Considerations

Recovery Mode is not just a reactive safeguard; it also serves as a deterrent. The possibility of Recovery Mode encourages users to maintain healthy collateralization ratios at all times. This self-regulating behavior reduces the likelihood of Recovery Mode being triggered frequently.