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Shortfall & Auctions

When liquidations are insufficient to fully cover a borrower's debt, the residual deficit becomes bad debt (shortfall). Rheofi employs an auction mechanism to socialize and recover this bad debt using the Risk Fund.

Risk Fund​

The RiskFund contract accumulates a portion of protocol revenue designated for covering shortfall events. Funds flow into the Risk Fund through the ProtocolShareReserve distribution pipeline and are converted into a base asset (e.g., USDT) via Token Converters.

interface IRiskFund {
    function transferReserveForAuction(
        address comptroller,
        uint256 amount
    ) external returns (uint256);
}

Shortfall Contract​

The Shortfall contract manages the auction lifecycle for bad debt recovery:

interface IShortfall {
    function startAuction(address rToken) external;

    function placeBid(address rToken, uint256 bidBps) external;

    function closeAuction(address rToken) external;
}

Auction Flow​

  1. Detection — Bad debt is identified when a borrower's position has negative equity and no further liquidation is economically viable.
  2. Start — Anyone can call startAuction() for an RToken market with outstanding bad debt.
  3. Bidding — Participants bid by offering to cover a percentage of the bad debt in exchange for Risk Fund assets. Bids are expressed in basis points (lower bid = willing to take less compensation).
  4. Close — After the auction period expires, closeAuction() settles the winning bid. The winner receives Risk Fund assets, and the corresponding bad debt is written off from the market.

Auction Types​

TypeDescription
LARGE_POOL_DEBTBad debt exceeds a threshold; bidders compete on how little Risk Fund compensation they need
LARGE_RISK_FUNDRisk Fund balance is large relative to debt; bidders compete on how much debt they will cover

Impact​

After auction settlement, the bad debt is removed from the RToken market's books via badDebtRecovered(), restoring the market's accounting integrity.