Recovery Mode

Recovery Mode is the protective state a pAsset market enters when its reserve-to-debt ratio falls below 100%, meaning the collateral in the market no longer fully covers its outstanding debt.

Polaris is built to operate indefinitely, and a system with that goal has to define how it behaves in every state it could reach. That includes the rare one where a market’s collateral no longer fully covers its debt. Rather than halt or unwind, Polaris specifies how the market keeps running and works its way back.

Reaching Recovery Mode is exceedingly unlikely. A market only falls below full backing after its earlier defences have been overrun: the restrictions of Defensive Mode, the pressure of the Protocol Safety Rate, and the liquidations and redemptions that restore backing along the way. Crossing the line would take a collateral crash fast and deep enough to outpace all of them at once. Designing for that case is what lets the protocol endure it.

Recovery Mode keeps every restriction of Defensive Mode and adds two protections:

• Redemptions are paid in proportion to the collateral that remains.
• Liquidations can only hold or improve the backing that is left.

Proportional redemptions

Above full backing, a redemption returns collateral at face value. Below full backing, paying face value would let the first redeemers take the whole reserve while later ones receive nothing.

Recovery Mode prevents this. Every redemption is scaled by the market’s current backing, so a market backed at 80% pays 80% of face value, to everyone, in the same proportion.

Because every redeemer takes the same cut, the backing ratio is preserved as redemptions happen. There is no advantage to exiting first and no penalty for exiting later. This is what lets the market keep operating honestly below full backing instead of freezing.

Liquidations

Liquidation by redistribution is disabled. Redistribution spreads a liquidated position’s debt across the remaining borrowers. In a fully backed market that cleanly clears a bad position, because the collateral behind it still covers the debt. Below full backing the same step becomes ambiguous: it pushes more debt onto positions that are themselves under-backed, weakening all of them at once. Repeated, it can collapse the market onto a single borrower, and none of it helps the market recover.

Liquidations must hold or improve the market’s collateralization. A liquidation that would push backing further down is not carried out, so the market’s health can only move in the right direction while it recovers.

Leaving Recovery Mode

A market leaves Recovery Mode when its backing rises back above full collateralization. Once backing recovers past the Defensive Mode threshold, the market returns to normal operation.

Backing recovers as:

• The collateral price rises. A market usually enters Recovery Mode after a sharp fall in the collateral price, so a recovery in that price is the largest and most direct lever back.
• Borrowers strengthen their positions. Adding collateral and repaying debt stay open throughout, and both lift the market’s backing.
• Yield streams keep flowing. The protocol’s yield sources continue through Recovery Mode, strengthening collateral ratios over time.
• Weak positions are liquidated. Every liquidation that proceeds can only hold or improve the ratio, so clearing the weakest positions moves backing in the right direction.
• The Protocol Safety Rate keeps pushing. It rewards conservative and collateral-only positions and taxes high leverage, steadily nudging the market back toward stronger backing.

Note: Recovery Mode is a feature of individual pAsset markets. It does not affect the bonding curve, which continues to function normally regardless of the state of any pAsset market.