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Introduction

Recovery Mode is activated when the Global Total Collateral Ratio (GTCR) of the system dips below 150%. In this state, any Trove with a collateral ratio less than the GTCR is subject to liquidation. Further, the system puts a halt to any borrower transactions that could potentially exacerbate the decrease in GTCR. The only way new MEAD can be generated during this period is by either improving the collateral ratio of existing Troves or by establishing a new Trove with a collateral ratio that is greater than or equal to 150%. Generally, if an adjustment to an existing Trove leads to a decrease in its collateral ratio, the transaction will only go through if the resultant GTCR remains above 150%.

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Definition of GTCR

The Global Total Collateral Ratio, or GTCR, refers to the proportion of the total value of all collaterals within the protocol, evaluated at their present prices, to the total outstanding debt across the protocol.Put differently, it’s the collective value of all Troves’ collateral measured in USD, divided by the cumulative debt of all Troves, denominated in MEAD.

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Rationale for the Recovery Mode

The primary objective of Recovery Mode is to encourage actions that rapidly increase the global Total Collateral Ratio (GTCR) to over 150%, and to motivate MEAD holders to refill the respective Stability Pool. From an economic perspective, Recovery Mode is structured to promote additional collateral deposits and debt repayments. Moreover, the very prospect of entering Recovery Mode serves as a preventive measure, steering the system away from ever entering this state. It’s important to note that Recovery Mode is not an optimal state for the system to operate in.

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Impact on fees

During Recovery Mode, while the redemption fee remains unaffected, the Minting fee is reduced to 0% to stimulate borrowing activities that positively impact the GTCR.

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Impact on liquidations

While in Recovery Mode, if your Trove’s Individual Collateral Ratio (ICR) falls below the GTCR, your Trove can be liquidated (even if your Trove’s collateral ratio is above 110%). To prevent this from happening, in both Normal and Recovery Mode, a user should maintain their collateral ratio over 150%.During Recovery Mode, the liquidation loss is capped at 110% of a Trove’s collateral. Any residual amount, i.e. the collateral above 110% (and below the Global Total Collateral Ratio or GTCR), can be recouped by the borrower who faced liquidation by claiming the surplus collateral.This implies that a borrower will encounter the same liquidation “penalty” (20%) in Recovery Mode as they would in Normal Mode if their Trove undergoes liquidation.

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Core Stability Mechanisms in Roots:

  • Each collateral asset type supported by Roots has a defined Minimum Collateralization Ratio (MCR).
  • Individual borrowing positions (Troves) must maintain a Collateral Ratio (CR) above this MCR to avoid liquidation.
  • This per-asset, per-position requirement is the first line of defense against undercollateralization. (Refer to “Getting Started” for MCR values).
  • If a Trove’s CR falls below the MCR for its specific collateral, it becomes eligible for liquidation.
  • Liquidations are designed to remove risky positions from the system promptly.
  • The process primarily utilizes the Stability Pool to repay the outstanding MEAD debt. (Refer to “Risk Management” for details on liquidation mechanics).
  • Users can deposit MEAD into the Stability Pool.
  • This pool acts as the primary source of liquidity to absorb debt from liquidated Troves.
  • Stability Pool depositors are incentivized by receiving the liquidated collateral, often at a discount, in exchange for their MEAD being used to cover the debt.
  • This mechanism helps to efficiently manage liquidations and protect the protocol from accumulating bad debt. (Refer to “Getting Started” and “Risk Management”).
  • The redemption mechanism allows users to exchange MEAD for a corresponding value of underlying collateral directly from the protocol, at face value (minus a variable redemption fee).
  • This is particularly important if MEAD’s market price temporarily falls below $1, as arbitrageurs can profit by buying cheap MEAD and redeeming it, which in turn helps restore the peg.
  • Redemptions typically target the riskiest Troves first, further incentivizing borrowers to maintain healthy collateral ratios. (Refer to the “Redemptions” document).

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Collective Impact on System Resilience:

These mechanisms collectively create a resilient system:
  • Proactive Risk Management: MCRs and the threat of liquidation incentivize individual borrowers to manage their risk.
  • Efficient Debt Clearing: The Stability Pool provides a ready source of MEAD to cover debts from liquidated positions.
  • Peg Stability: Redemptions offer a direct way to arbitrage MEAD back to its $1 peg.
While not termed a “Recovery Mode” in the sense of a global system state change with predefined parameter adjustments (like 0% minting fees or halting specific transactions based on a GTCR), the continuous operation of these individual and collective safeguards ensures the Roots protocol can handle market volatility and instances of undercollateralization effectively. Users are encouraged to maintain healthy collateral ratios well above their MCR to minimize their personal risk of liquidation or redemption.