Recovery Mode
What is Recovery Mode?
Recovery Mode kicks in when Total Collateral Ratio (TCR) of the entire system falls below 150%.
During Recovery Mode, Asset Portfolio with collateral ratio below 150% has risk to be liquidated.
In addition, to prevent TCR from continuing to decrease in the Recovery Mode, the system will block some transactions of borrowers. New PUST can only be borrowed by adjusting existing Asset Portfolio to increase their collateral ratio, or by opening a new portfolio with a collateral ratio>= 150%. In general, if an adjustment to an existing portfolio reduces its collateral ratio, the trade will only be executed if the final TCR is above 150%.
What’s the function of Recovery Mode?
The goal of the recovery model is to encourage borrowers to act in a way that rapidly increases TCR above 150%, and incentivizes PUST holders to replenish the Stability Pool.
Economically speaking, the Recovery Mode, which is designed to encourage adding collateral and repaying debt, also acts as a self-negating deterrent: the possibility of it occurring actually guides the system away from ever reaching it. Recovery mode is not an ideal state for a system.
Parameters Relative
Total Collateral Ratio(TCR)： The total collateral ratio (TCR) of the entire system. It’s fluctuant according to realtime collateral percentage in whole Palm protocol. You will find it in homepage of Palm Finance.
Safety Ratio (SR): Each type of Collateral has its own safety ratio on Palm, please refer to the relevant table.
Risk-Adjusted Value(RAV) = Safety Ratio * Token amount * Token Price in USD
Individual Collateral Ratio(ICR)=Collateral RAV/Debt. It shows the user's risk-adjusted collateral ratio of Asset Portfolio.
eg. Tom deposits 1000 TokenX at price of $2.75 with safety ratio of 0.8, and borrows 2000 PUST in debt.
RAV= 1000*2.75*0.8= 2200
ICR = 2200 RAV/2000PUST= 110%
In Recovery Mode, these parameters will be applied:
Adjusted_Safety_Ratio (ASR): Stablecoin collateral has a new safety ratio of 1.6 for the AICR calculation, while other assets will still use their safety ratios. That means the portfolio with more stablecoins has higher ratio and are more unlikely to get liquidated.
Adjusted Risk-Adjusted Value (ARAV)= Adjusted_Safety_Ratio * Price * Collateral_Amount
Adjusted Inividual Collateral Ratio(AICR): is the adjusted ICR by giving weight to stablecoins.
eg. Alice deposits $11000 in stablecoion qiUSDC, and borrows 10000 PUST.
-In normal mode, qiUSDC applies the safety Ratio 1.05, that is
RAV=11000*1.05=11550
ICR=Collateral RAV/Debt= 11550 RAV /10000 PUST=115.5%
-In Recovery mode, qiUSDC applies adjusted safety ratio 1.6, as consequence:
ARAV=11000*1.6=17600
AICR=Collateral ARAV/Debt =17600 ARAV/10000 PUST=176%
Alice won’t be liquidated as her AICR is above 150% and ICR is above 110%
How do liquidations work in Recovery Mode?
ICR = Individual Collateral Ratio
MCR = Minimum Collateral Ratio (On Palm it's set fixed 110% as the threshold )
TCR = Total Collateral Ratio
SP = Stability Pool
ICR <=100%
Redistribute all debt and collateral (minus ETH gas compensation) to active Asset portfolios.
100% < ICR < MCR & SP PUST > Asset portfolio debt
PUST in the Stability Pool is offset with the Asset Portfolio's debt.
The Asset Portfolio's collateral (minus ETH gas compensation) is shared between stability pool depositors.
100% < ICR < MCR & SP PUST < Asset portfolio debt
The total Stability Pool PUST is offset with an equal amount of debt from the Asset Portfolio. A fraction of the Asset Portfolio's collateral (equal to the ratio of its offset debt to its entire debt) is shared between depositors.
The remaining debt and collateral (minus ETH gas compensation) is redistributed to active Asset Portfolios.
MCR <= ICR
& AICR < TCR
& SP PUST >= Asset portfolio debt
In this case, the Stability Pool PUST is offset with an equal amount of debt from the Asset Portfolio. A fraction of collateral with dollar value equal to 1.1 * debt is shared between depositors.
Nothing is redistributed to other active Asset Portfolios. Since its ICR was > 1.1, the Asset Portfolio has a collateral remainder, which is sent to the CollSurplusPool and is claimable by the borrower. The Asset portfolio is closed.
MCR <= ICR & AICR < 150% & SP PUST < Asset portfolio debt
Do nothing. Because there is insufficient PUST in the stability pool to fully offset, this Asset portfolio is not liquidated.
AICR >= 150%
Do nothing.
FAQ
1.How can I make my portfolio safe in Recovery Mode？
By monitoring and increasing your Adjusted Collateral Ratio to 150% or greater, your Asset portfolio will be protected from liquidation. This can be done by adding collateral, repaying debt, or both.
2.Will I get liquidated if AICR is below 150% in Recovery Mode?
You can be liquidated in recovery mode if your AICR is below the TCR. In order to avoid liquidation in Normal Mode and Recovery Mode, users should keep their Asset portfolio collateral ratio (the normal one) above 110% as well as keeping their adjusted collateral ratio above 150%.
eg. Let’s assume that system TCR is 145% and Recovery Mode is activated. John’s AICR is 130% and he gets liquidated, while Alice’s AICR is 148% and above the TCR, her portfolio won’t get liquidated. Alice is safe, but she’d better increase her ratio above 150%.
3.How much of my collaterals will be liquidated in Recovery Mode?
4.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 adjusting (within the limits described above).
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