Balance Sheet's Contraction

When the stablecoin issued by the protocol is experiencing sell pressure (0.99), the protocol undergoes the contraction phase of its balance sheet.

To maintain a stable peg, the stablecoin's demand destruction must meet supply contraction. This can either happen through the Seigniorage redemption process (Debt contraction) or through the repayment of existing CDPs in the Lending Market (Credit contraction).

The most important principle at this stage is:

Protocol's Debt contraction should always occur at a greater or equal rate as Credit contraction. (During Contraction IR are raised at the same rate of Seigniorage Recoll)

Debt Contraction	Credit Contraction
Redemptions ↑	IRs ↑
Seigniorage Recollateralization ↑	CDP Repayments ↑
Collateral Deployment (ePOC + RR) = PUC ↓	Collateral Claim (ePOC)

• The profitability of the arbitrage provided by Seigniorage's redemptions incentivizes the Recollateralization process so that the protocol's Debt (PUC) can contract. At the same time the protocol's Credit (POC) is contracted and exercised in the form of ePOC by increasing IRs and forcing CDP repayments.

• On top of ePOC, the deployment of the RR accumulated during the expansion phase, always allows for a faster Recollateralization process to happen and thus for protocol Debt to contract faster then Credit. RR deployment can effectively backstop the Debt contraction phase and, also, further backstop or tamper the equity sell pressure.

• By exercising a complete claim on ePOC, the protocol has the ability to fully contract the stablecoin's supply produced by the Money Market. At the same time, by potentially fully recollateralizing through the deployment of collateral reserves (ePOC and RR) the protocol can guarantee 100% backing for all outstanding stablecoins produced through Seigniorage, hypothetically allowing for a complete Debt contraction in case demand drops to zero.

• As the protocol recollateralizes through the deployment of the RR, a % of the excess collateral acquire by the protocol can be utilized to repurchase the equity at a discounted value (see Recollateralization Reserve).

• As a result of a successful Recollateralization, the Protocol's Debt and PUC drop. The increase in the protocol's Credit in proportion to its Debt can allow DCRs and IRs to drop again, acting as an incentive to the lending activity to be resumed.