Recovery Mode

Recovery Mode is a protocol-level protection mechanism that activates independently per collateral type when its health drops below a critical level.

🔺 When is Recovery Mode triggered?

Each supported collateral type in Virtue tracks its own Total Collateral Ratio (TCR), calculated as:

$TCR(per collateral) = \frac{\text{Total USD value of that collateral}}{\text{Total VUSD debt backed by that collateral}}$

If the TCR for a specific collateral type falls below its designated Recovery Mode Threshold (RMT), Recovery Mode is triggered for that collateral.

This design ensures that risk is isolated and handled individually, preventing weaker assets from affecting the integrity of others.

🧭 What happens in Recovery Mode?

Once active for a collateral type, the following rules apply:

• CDPs backed by that collateral with a collateral ratio below RMT become liquidatable.

• The system blocks actions that would further reduce the TCR of that collateral type.

• Users may still:

  • Open new CDPs only if the collateral ratio is ≥ RMT

  • Adjust existing CDPs only if the change improves the TCR or keeps it above RMT

Any transaction that would reduce the TCR for that collateral type is rejected during this mode.

🧮 Liquidation Logic

Liquidation rules in Recovery Mode depend on:

• The CDP’s Individual Collateral Ratio (ICR)

• The availability of $VUSD in the Stability Pool

Liquidation Conditions in Recovery Mode

Condition	Action Taken
100% < ICR < MCR + Stability Pool VUSD ≥ position debt	The Stability Pool uses deposited VUSD to fully repay the position’s debt. All collateral is transferred to depositors.
100% < ICR < MCR + Stability Pool VUSD < position debt	Available VUSD in the Stability Pool covers part of the debt. A proportional share of collateral is given to depositors. Arbitrageurs may use Flash Minted VUSD to help complete the liquidation.
MCR ≤ ICR < RMT + Stability Pool VUSD ≥ position debt	The Stability Pool repays the debt and receives collateral worth 110% of the repaid amount. Any remaining collateral can be reclaimed by the original user.
MCR ≤ ICR < RMT + Stability Pool VUSD < position debt	Partial repayment is possible using available Stability Pool VUSD and Flash Mint VUSD. Up to 110% of the repaid debt’s value in collateral is transferred to depositors; the remainder can be reclaimed.
ICR ≥ RMT	No liquidation allowed. The position is safe under Recovery Mode conditions.

🧾 Notes

• The Stability Pool plays a central role in clearing under-collateralized positions by repaying debt and receiving collateral in return.

• When the pool lacks sufficient VUSD, arbitrageurs can intervene using Flash Minted VUSD, ensuring continued liquidation without systemic risk.

• This layered design supports resilience and fairness, even in extreme market conditions.

💸 What about fees?

• Borrowing Fee: Temporarily set to 0% to incentivize borrowing actions that improve system health

✅ How to avoid liquidation

To protect your CDP in Recovery Mode:

• Keep your collateral ratio above the RMT for the specific collateral you’re using

• You can do this by:

  • Adding more collateral

  • Repaying part of your VUSD debt

If liquidation occurs, your maximum loss is capped at 10% (i.e., 110% of debt value). Any surplus collateral can be reclaimed through the UI after liquidation.

💡 Why does this matter?

Recovery Mode is a safety net — designed not to punish users, but to restore solvency in extreme cases. Its purpose is to:

• Isolate risk per collateral type

• Encourage responsible borrowing

• Reinforce price stability for VUSD

By design, the possibility of Recovery Mode helps guide users to manage their CDPs responsibly before the system ever needs to activate it.