# Recovery Mode

Recovery Mode is activated when the Global Total Collateral Ratio (**GTCR**) of the system dips below `150%`. In this state, any Den with a collateral ratio less than the GTCR is subject to liquidation.

Further, the system puts a halt to any borrower transactions that could potentially exacerbate the decrease in GTCR. The only way new `$NECT` can be generated during this period is by either improving the collateral ratio of existing Dens or by establishing a new Den with a collateral ratio that is greater than or equal to `150%`.

Generally, if an adjustment to an existing Den leads to a decrease in its collateral ratio, the transaction will only go through if the resultant GTCR remains above `150%`.

#### Definition of GTCR <a href="#definition-of-gtcr" id="definition-of-gtcr"></a>

The Global Total Collateral Ratio, or GTCR, refers to the proportion of the total value of all collaterals within the protocol, evaluated at their present prices, to the total outstanding debt across the protocol.

Put differently, it's the collective value of all Dens' collateral measured in USD, divided by the cumulative debt of all Dens, denominated in `$NECT`.

#### Rationale for the Recovery Mode <a href="#rationale-for-the-recovery-mode" id="rationale-for-the-recovery-mode"></a>

The primary objective of Recovery Mode is to encourage actions that rapidly increase the global Total Collateral Ratio (GTCR) to over `150%`, and to motivate `$NECT` holders to refill the respective Stability Pool. From an economic perspective, Recovery Mode is structured to promote additional collateral deposits and debt repayments.

Moreover, the very prospect of entering Recovery Mode serves as a preventive measure, steering the system away from ever entering this state. It's important to note that Recovery Mode is not an optimal state for the system to operate in.

#### Impact on fees <a href="#impact-on-fees" id="impact-on-fees"></a>

During Recovery Mode, while the redemption fee remains unaffected, the Minting fee is reduced to 0% to stimulate borrowing activities that positively impact the GTCR.

#### **Impact on liquidations** <a href="#impact-on-liquidations" id="impact-on-liquidations"></a>

In Recovery Mode, if a Den's Individual Collateral Ratio (ICR) falls below the GTCR, it becomes eligible for liquidation, even if its collateral ratio is above 120%. To avoid liquidation in both Normal and Recovery Modes, maintaining a collateral ratio above 150% is recommended.

During Recovery Mode, the liquidation loss is capped at `120%` of a Den's collateral. Any residual amount, i.e. the collateral above `120%` (and below the Global Total Collateral Ratio or GTCR), can be recouped by the borrower who faced liquidation by claiming the surplus collateral.

This implies that a borrower will encounter the same liquidation "penalty" (`20%`) in Recovery Mode as they would in Normal Mode if their Den undergoes liquidation.