What is Recovery Mode?
Recovery Mode is a built-in mechanism in the Bank of Cronos Loans protocol that triggers when the system's total collateralization ratio falls below a predefined threshold of 150%. This mechanism is designed to ensure the stability and solvency of the system by allowing for the liquidation of all loans (troves) below 150% collateralization ratio. Under normal circumstances, loans can only be liquidated when their collateralization ratio falls below 110%.
The Bank of Cronos Loans protocol allows users to obtain interest-free loans by locking up CRO as collateral and minting a stablecoin pegged to the US Dollar called Cronos USD (CUSD). To maintain the stability of the system, it is essential to ensure that the total value of the CRO collateral is sufficient to back the outstanding CUSD supply.
Recovery Mode is activated when the system's total collateralization ratio falls below a predefined threshold of 150%. The total collateralization ratio is calculated as the total value of locked CRO collateral divided by the total outstanding CUSD debt.
When the Bank of Cronos Loans protocol enters Recovery Mode, all loans (troves) with a collateralization ratio below 150% become subject to liquidation. This is a deviation from the normal protocol behavior, where loans can only be liquidated if their collateralization ratio falls below 110%. By allowing the liquidation of undercollateralized loans during Recovery Mode, the protocol aims to restore its total collateralization ratio and ensure system stability.
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