What is Recovery Mode, why does it exist and what happens when a vault enters recovery mode?
Vault Type refers to a certain category of vaults - e.g. all 0% interest SOL vault belong to that vault type.
VTCR refers Vault Type Collateral Ratio which is the total value of the collateral locked up in that vault type divided by the total USH debt extended against it.
ICR refers to Individual Collateral Ratio. This refers to the current collateral ratio of an individual vault.
MCR refers to Minimum Collateral Ratio.
RMCR refers to Recovery Mode Collateral Ratio. This can be different for each Vault Type. For most Vault Types this is 150%.
Recovery Mode exists to ensure the Hedge protocol can sustain a large volatility in backing assets and still be solvent. It ensures that each vault type (e.g. SOL vault) is backing USH by at least 150% collateral ratio - this parameter may vary for different vaults and some vaults offered by the Hedge protocol may not even need to have a Recovery Mode enabled due to the nature of the assets or other parameters of the vault.
Because Recovery mode will cause vaults close to the threshold to be liquidated, there is a natural incentive by users not to open vaults that would cause the system to enter recovery mode. It acts as a deterrent for users to take risky positions.
A Vault Type (e.g. BTC vaults) enter Recovery Mode when their total collateral ratio falls under 150% (e.g. BTC value divided by USH generated against BTC).
A vault type enters Recovery Mode when the vault type's collateral ratio is under the recovery mode threshold - which is usually at least 150%. Because recovery mode is isolated for each vault type, the sudden decrease of one asset you do not hold in the Hedge protocol will not cause your position to be liquidated.
E.g. if Hedge offers BTC and SOL type vaults, but you only have a USH loan extended against SOL then a price crash of BTC will not impact your SOL vault's liquidation.
When a vault type is in Recovery Mode, any vault under the vault type's collateral ratio is eligible for liquidation. Additionally, collateral cannot be taken out from the vault's type and new loans that worsen the vault type's state will not be allowed.
To avoid liquidation, it is advised that users only open positions above the recovery mode threshold.
ICR < MCR
Vault will get liquidated using funds from the stability pool and the collateral will be given to stability pool participants.
ICR < RMCR
Vault is eligible for liquidation.
ICR > RMCR
Vault is safe and will not be liquidated.
When the stability pool is empty, the vault's debt and collateral will instead be redistribute according to the rules defined in Debt redistribution .