Recollateralization Reserve

(Open Market Operations)

The Recollateralization Reserve (RR) is a collateral reserve that the protocol holds and builds up with protocol earnings during the Expansion Phase of the balance sheet; it then deploys it to complement the Recollateralization process and decrease the equity dilution during the Contraction Phase.

The main sources of profit that the protocol utilizes to replenish the RR are:

• Interest Rates (IR) paid to the protocol during the expansion phase

• ePOC claim during the contraction phase (IR paid to the protocol during the contraction phase)

• A % of the Liquidation fees that go to the protocol, beyond that which go to the liquidators

• AMO profits (Market Making fees over POL)

Moreover, the protocol provides forward guidance on its own equity price by buying and selling it with a set (X%) % of the RR, capitalizing on the equity's price momentum driven by the Seigniorage Recollateralization/Decollateralization dynamics and replenishing the RR with the proceeds of this strategy.

Recollateralization (Debt Contraction)	Decollateralization (Debt Expansion)
Equity price ↓	Equity price ↑
RR Deployment	RR Replenishment
Equity bought with excess earnings	Equity sold for collateral (with CR drops)

E.g. For simplicity, let's assume the protocol holds: 100$ of exercisable credit in the Money Market (ePOC) 100$ of outstanding protocol's debt (PUC) 20$ of RR acquired during expansion

When debt contraction starts, the protocol recollateralizes through Seigniorage, equity gets diluted IRs are raised and claimed from the Money Market: 75$ Credit (ePOC) 75$ Debt (PUC) 45$ RR Contraction continues and the protocol tampers 50% of equity dilution by deploying 12.5$ of RR:

75$ Credit (ePOC) 50$ Debt (PUC) 32.5$ RR

If redemptions end and the contraction phase stops, the protocol can afford to buy for example 15$ of equity when it's price is discounted due to the recollateralization of protocol's debt that just happened from 100$ to 75$ and then, again from 75$ to 50$ (with equity dilution 50% tampered) 75$ Credit (ePOC) 50$ Debt (PUC) 32.5$ RR (17.5$ Collateral, 15$ Equity)

If expansion is resumed, the protocol can drop Seigniorage's CR and increase it's debt (up to 75$ in this case), the equity is then sold for collateral with every CR bpt decerease and the RR is fueled with more collateral as the equity price is increasing. If the contraction continues, the protocol has sufficient credit to fully recollateralize and completely repay its debt, potentially providing redemptions at 100% collateral value for every single outstanding stablecoin.

For this reason protocol's debt should never be allowed to increase more than protocol's credit:

ePOC always >= PUC, (as PUC approaches PUC=ePOC → MCRs↑; see PUC vs POC); RR% for tampering equity dilution and Recollateralization → algo (no Gov) RR as a % of ePOC before Revenue Sharing with LPs + RR% for Equity repurchase → voted by Gov.

Revenue from the RR is shared with equity/stable LPs after (RR >= xx[100%?]% ePOC)