In Case of Default
Participant has an under collateralized VAULT
In the event that the price of ETH has decreased by 50% or more since the last cycle, causing the collateral value to fall below 1x the remaining cycle contributions, then the following occurs:
Scenario 2A: Defaulting participant who can pay from collateral
For a defaulting participant who has not yet been a beneficiary in the past and who has enough collateral in the VAULT to make the cycle contribution
Collateral is partially liquidated to make cycle contribution as described above
The participant stays in the defaulting status until they contribute in the next cycle
Scenario 2B: Defaulting participant who cannot pay from collateral
For a defaulting participant who has not yet been a beneficiary in the past, but who does NOT have enough collateral in the VAULT to make the cycle contribution
The remaining collateral (in ETH) of the defaulting participant is distributed equally among remaining participants, who are NOT benefactors, and added to the other participants collateral balances.
The FUND contract then appoints a beneficiary and sends the fund contributions to the beneficiary, the amount of which will be less by 1 cycle contribution (this is the cycle contribution that was not paid by the defaulting participant).
Despite the fund amount being less by 1 cycle contribution, this is offset by the collateral distribution in ETH (that took place in the previous step). The collateral distribution is made in ETH (as opposed to liquidating the ETH and funding the contract in USDC) to give remaining participants an opportunity to recover the missing contribution amount if the price of ETH increases later on.
The defaulting participant is now uncollateralized and expelled from the DAO.
The DAO participants are now reduced by 1, but the DAO term is maintained.
Scenario 2C: Defaulting Benefactor
For a defaulting participant who is a benefactor (has already been a beneficiary in a previous cycle), the same actions from Scenario 2B above will be applied.
Example: Defaulting Benefactor
In our example, a participant makes cycle 1 contribution of $100 in USDC successfully. He misses cycle 2 contribution, but since his VAULT is still overcollateralized, his collateral is partially liquidated to make the cycle 2 contribution. On the second cycle, he is appointed beneficiary and receives $1,000 in USDC
By cycle 3, the price of ETH has fallen precipitously (from $2,000/ETH to $1,1000/ETH), causing the participant to be under collateralized. Simultaneously, he misses his cycle 3 payment and now becomes a defaulting benefactor.
The grace period for replenishing his collateral expires. The amount of ETH remaining in the VAULT is 0.6944, with a value of 0.6944 x $1,100/ETH = $763.
This ETH is divided among the remaining participants who have not yet been beneficiaries, 8 participants after cycle 2, so each participant receives 0.6944 / 8 = 0.0868 ETH each. Each of these participants is sent 0.0868 ETH (valued at $95 at current ETH price)
The new beneficiary for cycle 3 receives $900 in USDC + 0.0868 in ETH. In case the ETH price recovers, all future beneficiaries will receive an amount greater than $1,000 in value.
STEP 5: Contribution amounts in FUND contract is available to beneficiary to withdraw
Once the funding period is completed and all funds are accounted for in the FUND contract, the FUND contract selects the beneficiary next in line to be the beneficiary. Appointment of the beneficiary has the following criteria:
The Participant should NOT have been a beneficiary in the past.
The Participant should NOT be in defaulting status (have defaulted on the current cycle contribution).
In case there are no eligible participants, due to participants defaulting, then the participant next in line will be selected as beneficiary. This participant is called a "graced defaulter".
Once the beneficiary is appointed, all funds, along with the collateral transferred from other defaulting participants will be available for the beneficiary to withdraw. The fund is withdrawn in USDC, while the reimbursement is withdrawn in ETH. This concludes the funding period.
Turnaround Time
In a normal funding cycle with no undercollateralized VAULTs, the turnaround time from the start of the funding period to the end of the funding period should be no more than
Predetermined funding period duration
+
time to execute smart contract code
The additional time beyond the predetermined funding duration is given for the FUND contract to execute the collateral liquidation (as needed), beneficiary appointment and funds transfer functions.
Example: Predetermined funding period duration is 48 hours. Time to execute smart contract is 0.01 hours. Turnaround time is 48.01 hours.
A grace period will be applied to the 2nd phase of the DAO. In that case, in a funding cycle where there are defaulting participants with undercollateralized VAULTs, the turnaround time from the start of the funding period to the end of the funding period should be no more than
Predetermined funding period duration
+
Grace Period
+
Time to execute smart contract code
The grace period is provided for a defaulting participant or defaulting benefactor to replenish the VAULT.
Example: Predetermined funding period duration is 48 hours. Grace period is 24 hour. Time to execute smart contract is 0.01 hours. Turnaround time is 72.01 hours.
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