Solvency is a key feature of the Liquid Loans protocol.
Every USDL must be overcollateralized by PLS.
In order to ensure solvency, the Total Collateral Ratio (TCR) of the system must stay high.
When the TCR falls below a certain threshold, Recovery Mode kicks in.
Keep reading to learn what Recovery Mode is, and what it means for your Vault.
When the Total Collateral Ratio (TCR) of the system falls below 150%, recovery mode kicks in.
The purpose of recovery mode is to increase the total collateral health of the ecosystem.
In Recovery Mode, it is not possible to:
If your vault is 100% or less, your total collateral and total debt will be distributed to all existing vaults.
If your vault is between 100-110%, your vault will be liquidated normally using the Stability Pool.
If your vault is between 110-150%, your vault will be liquidated at 110% and your remaining PLS collateral will remain in your vault.
The best way to protect yourself in Recovery Mode is to always keep your vault well above 150% Individual Collateral Ratio.
This way, you will not be liquidated when the TCR of the ecosystem falls below 150%.
If you’re less risk averse, you can keep your vault below 150%, but regularly monitor the TCR of the Liquid Loans protocol and the price of PLS.
It may also be smart to keep your USDL debt liquid, so that you can increase the ICR of your vault if you are approaching 150% and the TCR is approaching Recovery Mode levels.
Recovery mode exists to ensure that USDL is always backed by excess collateral.
It initiates at 150% TCR, and reduces liquidation requirements and tightens lending conditions.
As long as you maintain a collateral ratio above 150%, and monitor the TCR of the system regularly, you do not have to worry about Recovery Mode.
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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.
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