# 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.

1. **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.&#x20;

{% content-ref url="../f-x-protocol-mechanisms/rebalancing-the-position-liquidation-brake" %}
[rebalancing-the-position-liquidation-brake](../f-x-protocol-mechanisms/rebalancing-the-position-liquidation-brake)
{% endcontent-ref %}

2. **Liquidation**

In the event of failure in the previous step, hard liquidations can be triggered to preserve fxUSD's backing.

{% content-ref url="../f-x-protocol-mechanisms/rebalancing-the-position-liquidation-brake/liquidation-process" %}
[liquidation-process](../f-x-protocol-mechanisms/rebalancing-the-position-liquidation-brake/liquidation-process)
{% endcontent-ref %}

3. **Reserve 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.



4. **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](advanced-peg-protection-mechanisms/understanding-the-redemption-mechanism) process, except that there is no redemption fee in this case.

{% content-ref url="risk-parameters" %}
[risk-parameters](risk-parameters)
{% endcontent-ref %}

5. **Recapitalization**

If the total collateralization ratio drops below 100%, the protocol halts new xPOSITION openings and deploys protocol assets to restore the fxUSD peg.
