DCRs

(Reserve Requirements)

DCRs or Dynamic Collateral Requirements to open new CDPs in the Money Market change with different economic conditions, according to the balance sheet's state of contraction/expansion. DCRs influence the growth of the protocol's Credit and the amount of collateral in the Money Market by affecting LTVs for every new Debt position and, thus, POC and ePOC.

• Credit/Debt Contraction (DCRs↓): When Credit contracts, protocol's debt is also repaid using collateral reserves and the proceeds of the Credit exercise. Less Debt (PUC) means less Credit required in the balance sheet (ePOC) to back it, hence, better borrowing conditions and less collateral required to open new debt positions (CDPs) in the Money Market. During this phase, lending gets incentivized by favorable LTV conditions for new CDPs even if Interest Rates are high.

• Credit/Debt Expansion (DCRs↑): As Credit expands, as a result of the increased borrowing demand, Interest Rates are lowered and Debt is also allowed to expand through the decrease of MCRs in the Seigniorage process. Likewise, the increase in the Debt (PUC) of the protocol and therefore in the level of risk, in turn, leads to a greater demand for Credit guarantees (ePOC). During this phase DCRs increase capitalizing on the opportunity provided by the increased borrowing demand and Credit expansion and, also, as a result of the demand for security for the increase in Debt. By growing, DCRs also disincentivize the build up of excessive leverage and speculative Debt bubbles in the Money Market. Then, by raising MCRs, the protocol can backstop Debt accumulation.