Protocol Deficit Coverage Models

Protocol Deficit Coverage Models are the structured rules for how a protocol handles situations where its liabilities exceed its assets. These models define the order of operations for covering a deficit, such as using an insurance fund first, followed by a reduction in liquidity provider shares or the minting of new governance tokens to raise capital.

Having a clear, pre-defined model is essential for maintaining trust and preventing panic during a crisis. It allows stakeholders to understand their exposure and how the protocol will react to systemic shocks.

By codifying these responses, the protocol avoids ad-hoc, potentially controversial decisions during high-stress periods. These models are a key element of a protocol's risk management framework.