Balance Sheet's Expansion

When the stablecoin issued by the protocol is experiencing buy pressure (1.01) we are in an expansion phase of the protocol's balance sheet.

During this phase, to maintain its peg, the stablecoin's supply must expand. This can either happen through the Seigniorage minting process (Debt expansion) or through the opening of new CDPs in the Lending Market (Credit expansion).

The 1st and most important principle at this stage is:

Protocol's Debt expansion should never exceed protocol's Credit.

Minting < Lending (High Borrow Demand)	Minting > Lending (Low Borrow Demand)
IRs↓	IRs↓
low DCRs ↑	higher DCRs ↓
Start Decollateralization (MCR↓)	Stop Decollateralization (MCR↑)

• When high borrowing activity is taking place the protocol's Credit is expanding faster than the prococol's Debt, this is a desirable situation. Interest Rates are low in this phase since there's no need to contract the stablecoin supply. Dynamic Collateral Requirements in the Money Market are relatively low since the protocol can grow its liabilities (PUC) to meet the expansion in Credit (ePOC is also growing). For this reason DCRs can gradually increase, disincentivizing excessive speculation and guaranteeing a sustainable growth, all while the drop in Minting Collateral Requirements can allow a gradual Decollateralization process to take place.

• When the protocol is undergoing low borrowing demand but the stablecoin is still experiencing buy pressure, protocol's Debt is increasing faster than protocol's Credit, this is permitted only as long as the credit and/or collateral reserves of the protocol can guarantee its solvency. Interest Rates are kept low until there isn't demand for contraction. DCRs are growing relatively higher with the difficulty of the Credit of the protocol to keep pace with the Debt expansion (PUC is growing, hence ePOC needs to follow), higher DCRs can disincentivize the lending activity. For these reasons Minting Collateral Requirements are raised, sharply if needed, halting the Decollateralization process, favoring Recollateralization and stopping the protocol Debt expansion up until sustainable growth conditions are met again.

• As the protocols allows its Debt to expand, the price of the equity token is also gradually increasing thanks to its supply shrink being paired with an increased demand for minting. During this phase the protocol capitalizes on the Decollateralization mechanics and the equity accumulated in the Recollateralization Reserve is gradually being converted back into collateral (see Recollateralization Reserve).