Risk Fund & Shortfall Handling
The Risk Fund is Rheofi's primary financial backstop, designed to absorb bad debt and protect suppliers from losses caused by under-collateralized positions. It operates as a protocol-level reserve that accumulates funds over time and deploys them during shortfall events.
Risk Fund Accumulation
The Risk Fund is funded through a dedicated share of protocol revenue — currently set at 20% of all reserve distributions. Additional contributions come from liquidation spreads and stability module fees. These inflows ensure the fund grows in proportion to protocol activity, building a buffer that scales with the platform's total exposure.
Shortfall Detection
A shortfall occurs when a borrower's position becomes under-collateralized and liquidation fails to fully recover the outstanding debt. The protocol continuously monitors account health factors, and when a liquidation leaves residual bad debt — meaning the collateral seized is insufficient to cover the borrowed amount — the shortfall is recorded against the affected market.
Auction Mechanism
When a shortfall is detected, the protocol initiates an auction process to resolve the bad debt. Risk Fund reserves are used to cover the deficit through a competitive auction:
- The bad debt amount is published as an auction lot.
- Participants bid to repay the debt in exchange for discounted Risk Fund assets.
- The auction runs for a defined period, and the most favorable bid is accepted.
This mechanism ensures market-driven price discovery for bad debt resolution while preserving the Risk Fund's long-term solvency.
Recovery Process
Once an auction concludes, the winning bidder repays the outstanding debt to the affected market, restoring its accounting balance. The protocol's bad debt ledger is updated accordingly, and normal market operations continue. If the Risk Fund is insufficient to cover a shortfall, protocol administrators may authorize supplementary measures — such as treasury allocations or targeted token distributions — as needed.