Recovery Mode
The stability and system solvency rely on the quantity of BPD tokens present in the Stability Pool and more importantly, the Total Collateral Ratio (TCR) across all Vaults, which is calculated as the total collateral (BTC value in USD) divided by the total debt (in BPD).
The protocol has a built-in Recovery Mode to ensure the system remains adequately collateralized during times of crisis. This mode is activated as a last resort if the Total Collateral Ratio drops below the critical threshold of 150%. Vaults with a collateral ratio between 110% and the current Total Collateral Ratio are also liable for liquidation in this unique operating mode. Only the Stability Pool is available for these supplementary liquidations, and they are not subject to Redistribution. Additionally, the entire debt can be liquidated at once.
To prevent the borrower from experiencing significant losses, a limit of 110% of the liquidated debt is placed on the collateral offset against the Stability Pool. After the liquidation, the borrower has the option to recover any of their BTC collateral that remains above the 110% limit.
When in Recovery Mode, the liquidation mechanism abides by the following rules:
| Collateral Ratio of Vault | Liquidation Process | |
|---|---|---|
| < 100% | The complete debt and collateral of the Vault are directly redistributed to other Vaults without any pre-existing Stability Pool offset. | |
| between 100% and 110% | As in normal operation, the liquidation process of the Vault involves offsetting its debt and collateral against the Stability Pool and redistributing any remaining amounts to other Vaults. | |
| between 110% and TCR | If the Vault’s entire debt can be liquidated, it is offset against the Stability Pool during the liquidation process. The collateral that is liquidated is limited to 110% of the debt, and any amount above this limit can be reclaimed by the borrower. | |
| >TCR | Liquidation is not possible. |
By incentivizing Stability Providers to increase their deposits during Recovery Mode, these modifications lead to an improvement in the system’s Total Collateral Ratio.
The presence of Recovery Mode can prevent the system from falling below the critical threshold. The potential for additional liquidations such as vaults whose collateral ratios are between 110% and the TCR encourages riskier borrowers to increase their collateral ratios and Stability Providers to boost their deposits well before the system reaches the threshold ratio of 150%. However, it is advisable for risk-averse borrowers to always maintain a collateral ratio of more than 150%.
Vault Operation Limitations:
When the system is in Recovery Mode any borrower operation that would cause the TCR to drop further is temporarily disabled until the TCR is above 150%. Furthermore, any operation that would bring the TCR below 150% is also prohibited by design.
While in Recovery Mode it is only possible to:
- Increase collateral amount
- Repay Debt
- Increase collateral and repay debt in the same transaction
- Increase collateral and increase debt in the same transaction such that the resulting Vault’s collateral ratio increases to over 150%.
Additionally, it is only possible to initiate the opening of new Vaults in Recovery Mode provided their collateral ratio is a minimum of 150%. This precautionary measure serves to safeguard users from unintentionally generating Vaults that are at risk of liquidation soon after their creation.