# Collateral Management Explanations

This section aims to illustrate the path dependent nature of the states of vaults. As smart contracts do not automatically run computation without off-chain input, the level of the collateral ratio needs to be actively calculated and observed through an action of a user in order to influence the state of a vault. Therefore, without a user interaction, the vault will not note if a certain collateral ratio is not observed.

The collateral ratio in a vault is influenced by a number of factors: Posting and withdrawing collateral by the minter, baking rewards and changes in the collateral FX.

Minters need to closely monitor the collateral ratio in order to retain adequate levels and avoid a step in by a third party.

In short the following rules apply:

1. If the collateral ratio in a vault is observed by a user at or above the target collateral ratio, then the vault is adequately collateralized and not open for step ins.
2. If the collateral ratio in a vault is observed by a user at or below the emergency collateral ratio, then the vault is NOT adequately collateralized and it is open for step ins.
3. If the collateral ratio in a vault is observed by a user below the target collateral ratio and above the emergency collateral ratio, then the state of the vault depends on which of the two collateral ratios was last observed to be touched or breached.
• If the collateral ratio was last observed to be at or above the target collateral ratio, then the vault is adequately collateralized and not open for step ins.
• If the collateral ratio was last observed to be at or below the emergency collateral ratio, then the vault is in NOT adequately collateralized and it is open for step ins. ### Collateral Ratio Example#

For this example, it is assumed that all moves in collateral ratio are caused by moves in collateral FX.

A vault starts with minting the maximum amount of youves tracker tokens, the collateral FX is observed to move slightly up afterwards. The collateral FX moves then such that the collateral ratio is observed to breach the target collateral ratio at (1) and drops between the target- and the emergency collateral level. The vault is not open to step ins. Next the collateral FX drops so that the collateral ratio is observed to breach the emergency level at (2). The vault is now open for a step in. Any step in would lead the vault to be back at target collateral ratio again. Then the collateral FX moves up again so that the collateral ratio is observed to be in-between the target- and the emergency collateral level. The vault remains open for a step in. The collateral FX moves now such that the collateral ratio is observed breaching the target collateral level at (3) to the upside. The vault is no longer open for a step in. There is a tolerance of 5%-age points to reach the target. Finally, the collateral FX moves down again, so that the collateral ratio is observed to breach the target collateral level to the downside. This does not change the state of the vault. It is not open for a step in. ### Step In Numerical Example#

• We only look at full step ins. Partial step ins are ignored for now.
• For these calculations, the platform assumes the price of one uUSD to be one USD at all times.
• The initial XTZ/USD exchange rate was at 3.0.
• Minter a posted XTZ 100 into a vault. The equivalent value of the XTZ collateral in USD is 300.
• Minter a minted uUSD 100, attaining a collateral ratio of 300%.
• We ignore the growth of outstanding youves tracker tokens through the liability interest rate for simplicity, so the outstanding youves tracker tokens remain at 100.
• Over time, the XTZ/USD exchange rate drops to 2.0, implying a collateral ratio of 200%, which is at the emergency level.
• This triggers the vault to be open for a step in.
• Minter a is late in reacting to the state of the vault, so party b steps in.
2. The value of the collateral is now USD 200.
3. To reach a collateral ratio of 300%, the minted amount should be at uUSD 66.67.
4. Hence there is an excess of 33.33 uUSD minted.
• Posting and burning uUSD 33.33 would eliminate the excess minted amount bring the vault back to a collateral ratio of 300%.
• The vault pays out a bonus of 12.50% of the step in amount to the party stepping in.
• The vault should also still be at target collateral ratio after paying out the bonus.
• As a consequence, the step in amount to post and burn needs to be higher than uUSD 33.33, otherwise there would not be any excess collateral to pay out a bonus while maintining the target collateral ratio.
5. Party b can either use uUSD from its wallet, buy them from another source like a DEX or mint new uUSD.
6. Party b posts and burns uUSD 53.33 and receives XTZ 30.00, which are worth USD 60.00 at the time, (1 + bonus) times higher than the value of the posted uUSD amount.
7. The remaining collateral is XTZ 70, worth USD 140.00.
8. The remaining minted amount is 46.67, which results in a collateral ratio of 300%.