Default Recovery Rates

Default recovery rates measure the percentage of the principal amount that a lender or protocol is able to recover after a borrower defaults. In an ideal scenario, the recovery rate is 100 percent, meaning the collateral was sufficient to cover the entire debt.

However, in reality, factors such as slippage during liquidation, market illiquidity, and the speed of price drops can result in lower recovery rates. Protocols analyze these rates to determine the appropriate collateralization requirements and to assess the overall risk of their lending pools.

High recovery rates indicate a well-designed and stable protocol, while low rates suggest that the protocol is vulnerable to systemic shocks. It is a vital metric for assessing the efficacy of liquidation mechanisms and the robustness of the capital stack.