🧘♂️Risk framework
Aladdin DAO's absolute priority is to ensure the integrity of all stakeholders' capital. Please find the incremental risk framework applied to f(x) Protocol below.
Rebalancing - Liquidation Brake
The liquidation brake mechanism maintains all leverage positions at the safest leverage levels in a progressive manner. It enables the best compromise between capital efficiency and the protocol's integrity.
🪂Rebalancing the Position (Liquidation Brake)Liquidation
In the event of failure in the previous step, hard liquidations can be triggered to preserve fxUSD's backing.
Liquidation processReserve Fund
In the event of failure of the two previous steps, the protocol can face bad debt. A portion of the collected protocol fees is held in a Reserve Fund, which serves as a first layer of compensation in the event of any bad debt occurrence.
Bad Debt Redistribution
If the Reserve Fund can't compensate for all the bad debt, it is shared among the remaining leveraged positions. More specifically:
In case of under-collateralized debt on xPOSITIONs, the shortfall is proportionally redistributed across active xPOSITIONs if the reserves are insufficient.
Regarding sPOSITIONS:
If the overall sPOSITION LTV is still below 100%, the system will redistribute bad debt from insolvent sPOSITIONs to healthy sPOSITIONs
In the very unlikely occurrence of an overall sPOSITION LTV crossing 100%, which means all the previous steps would have failed:
All operations (open/close/rebalance/liquidate/redeem) are disabled
All outstanding sPOSITION bad debt gets charged as one-off funding to xPOSITIONs
All sPOSITIONs' outstanding collateral (fxUSD) is redeemed against xPOSITIONs. It works exactly the same as the fxUSD redemption process, except that there is no redemption fee in this case.
Recapitalization
If the total collateralization ratio drops below 100%, the protocol halts new xPOSITION openings and deploys protocol assets to restore the fxUSD peg.
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