---
# System prepended metadata

title: Bad Debt Socialization

---

# Bad Debt Socialization

In the event that the SafetyModule fails to prevent critical bad debt accumulation, we will need to socialize the bad debt among all depositors and borrowers. Socialization of bad debt is an alternative approach to first-come-first-serve approach, when first users will withdraw everything. By socializing bad debt, we want to introduce a more fair approach to deal with bad debt and allow everyone to save their assets.

## Bad Debt Detection, Freezing Markets, and "Bricking Pools"

Primarily, we propose implementing two different mechanisms to pause markets: market freeze and "bricking" the pool. The distinction lies in the fact that while it is possible to unfreeze the market, "unbricking" the pool is not an option.

Why do we need two methods of pausing markets? Simply put, we aim for automation, wherein our tools (such as Hypernative) can automatically freeze markets upon detecting significant bad debt.

Subsequently, we can conduct a thorough assessment of the situation and either unfreeze the market or permanently brick the pool if there is no viable solution.

#### What Happens When the Pool is "Bricked"?

During this state, ONLY withdrawals are permitted, but deposits are inactive, and the pool will remain irreversibly inaccessible. Should users wish to participate in the same pool and pairing again, they will need to establish a new pool.

## Socializing Bad Debt After Pool "Bricking"

To facilitate withdrawals, as previously mentioned, we must socialize bad debt

For this purpose, we have introduced a new variable called the "slash ratio." This ratio will uniformly impact every user attempting to withdraw funds from the pool, calculated as a percentage in USD terms.

The slash ratio calculation is as follows:
$1 - \frac{{\text{SUM(all deposits)}}}{{\text{SUM(bad debts) + SUM(all deposits)}}}$

In simpler terms, as bad debt accumulates, the proportion of bad debt to be socialized increases, and vice versa.

For instance, if we have:
```
Total deposits = $310
Bad debt = $20

Slash ratio = 1 - ($310 / ($310 + $20)) = ~6%
```

This implies that every user will incur a 6% reduction in USD terms when attempting to exit the pool. It is also important that because repayments are no longer possible, as pool is bricked, borrowed USD value will be subtracted from deposited value

## Price Freezing

What if prices for Riz assets fluctuate after the pool is "bricked" and potentially plummet to zero?

To address this, we propose a straightforward solution: snapshot (freeze) the prices of Riz pool assets at the block when we brick the pool.

Why implement this? Here are the reasons:
- Enhanced user experience for depositors, ensuring they will receive their assets back even if the price plummets to zero.
- Simplified calculations and greater consistency across all withdrawals.
- Elimination of the need to explain significant discrepancies in asset returns due to drastic changes in asset prices.

## Conclusion
The proposed solution appears to strike a good balance. While there might be alternative approaches this solution seems practical and effective.