Secured Finance Deep Dive Series

Emergency Global Settlement

Ultimate Safety Net for Lenders in Extreme Scenarios

Kenji Mitsusada

Published in

Secured Finance

5 min readOct 20, 2023

Introduction

In the ever-evolving landscape of decentralized finance (DeFi), Secured Finance stands as a beacon of innovation and security. Our platform offers a unique feature of Zero-Coupon bond trading for digital assets, all underpinned by blockchain technology. While we pride ourselves on the robustness and reliability of our protocol, we also acknowledge the inherent risks in the DeFi space. That’s why we’ve implemented a fail-safe mechanism known as the Emergency Global Settlement feature. This article aims to provide an exhaustive understanding of this feature, its importance, and its operational intricacies, supplemented by an in-depth case study.

What Exactly is Emergency Global Settlement?

Emergency Global Settlement is our protocol’s ultimate safety net. It’s a meticulously designed mechanism activated only in the most dire of circumstances — think catastrophic system failures, severe security breaches, or critical, unresolvable bugs. This is not a feature that comes into play for trivial glitches or minor vulnerabilities; it’s essentially the “nuclear option” for ensuring the absolute safety of user funds when all else fails.

Why is it Crucial?

In a world where digital assets are becoming increasingly targeted by malicious actors, the Emergency Global Settlement acts as a bulwark against catastrophic loss. It’s not just a feature; it’s a commitment to our users that their funds have the highest level of protection possible.

The Nuts and Bolts: How Does It Work?

Immediate Actions by the Protocol

Cease All Platform Activities: The moment Emergency Global Settlement is triggered, all trading, lending, and other financial activities on the platform come to an immediate halt.
Activation of the Special User Interface (UI): Users are then redirected from the standard platform interface to a specialized UI, engineered explicitly for handling the procedures.
Snapshot and Comprehensive Collateral Assessment: The protocol takes an instantaneous snapshot of all user positions and activities. Following this, it calculates the entire collateral balance held in the Secured Finance Vault.

User-Specific Actions

In-depth Account Review: On the special UI, users can scrutinize their positions, which are calculated and presented as a net value based on the snapshot data.
Redemption and Fund Withdrawal: The only actions users can perform at this stage are the redemption of their positions and the withdrawal of their funds. The platform restricts any new trades, loans, or deposits during this critical period.

Case Study: A Deep Dive into the Emergency Global Settlement Process

Hypothetical Scenario

Let’s consider a hypothetical yet plausible scenario where a severe security breach threatens the integrity of the entire Secured Finance protocol.

Protocol’s Immediate Response

Immediate Platform Shutdown: All ongoing activities are abruptly halted.
Special UI Activation: Users find themselves on a specialized UI designed for this very contingency.
Snapshot and Collateral Calculation: A snapshot is taken, and the collateral balance is meticulously calculated.

Example: Assume the total snapshot value of the collateral balance is $100 million under Secured Finance Vault. Within this, WBTC accounts for $20 million, ETH for $30 million, and USDC for $50 million. This sets the collateral ratio at WBTC:ETH:USDC = 20%:30%:50%.

User Actions

Detailed Account Review: Users are given the tools to perform an in-depth review of their net positions, each calculated as a snapshot Value.
Redemption and Withdrawal: Users can redeem their positions and withdraw their funds, but are restricted from initiating any new activities.

Example: Upon reviewing his snapshot-based account details, User A has his net asset value of $1,000. When he place the ‘Redeem’ action, he is allocated $200 in WBTC, $300 in ETH, and $500 in USDC, which he can then transfer to his own wallet. Notably, although he originally lent only in ETH on our platform, his net asset value is returned to him in a diversified mix of collateral currencies which is WBTC, ETH, and USDC at current stage.

Addressing the Elephant in the Room: What if Collateral Falls Short? (under implementing)

In an ideal world, the collateral held in the Secured Finance Vault would always be sufficient to cover the lenders’ funds. However, we must prepare for less-than-ideal situations where the collateral value is less than the amount owed to lenders, resulting in a negative net asset value (NAV).

The Safety Net: Reserve Fund to the Rescue

Secured Finance maintains a reserve fund specifically designed to fill any gaps between the collateral value and the lenders’ amount. This reserve fund acts as an additional layer of security, ensuring that lenders’ funds are as secure as possible.

When the Reserve Fund Isn’t Enough: Fair Loss Distribution

In extreme cases where the shortfall persists even after exhausting the reserve fund, Secured Finance has a mechanism in place to distribute the losses among lenders fairly. This is not a ‘first-come, first-serve’ system but rather a methodical approach to minimize individual and collective risk.

Calculation Method for Fair Loss Distribution
The protocol compares the total collateral against the total amount due for repayment to lenders. For instance, if the collateral accounts for 90% of the repayment amount, then each lender will receive 90% of their asset value based on the snapshot taken at the time of the Emergency Global Settlement.

By implementing this fair loss distribution mechanism, Secured Finance ensures that the damage is equitably distributed among all lenders, thereby maintaining the integrity of the platform even in the most challenging scenarios.

Conclusion: The Ultimate Safety Net

The Emergency Global Settlement feature is more than just a protocol mechanism; it’s a multi-layered safety net designed to protect each user’s assets and maintain the overall integrity of the Secured Finance ecosystem. By ensuring a fair and transparent method of fund distribution, it safeguards individual and collective interests in extreme scenarios. This feature is not just a win for lenders and borrowers; it’s a monumental step towards the sustainable growth and long-term viability of our protocol.

About Secured Finance

Secured Finance is revolutionizing the digital asset landscape by constructing interbank-grade capital markets. Our innovative protocol is designed to offer a secure, flexible, and scalable fixed-income solution for digital assets. Comprised of a team of expert investment bankers, we are committed to integrating traditional finance wisdom into the realm of cryptocurrency and digital assets.

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