> For the complete documentation index, see [llms.txt](https://yuzu-money.gitbook.io/yuzu-money/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://yuzu-money.gitbook.io/yuzu-money/yuzu-alpha/yuzu-protection-pool-yzpp/yzpp-first-loss-mechanism.md).

# yzPP First-Loss Mechanism

yzPP provides a layer of protection to the [yzUSD](https://yuzu-money.gitbook.io/yuzu-money/yuzu-stablecoin/yuzu-stablecoin-yzusd) [Collateral Pool](https://yuzu-money.gitbook.io/yuzu-money/yuzu-stablecoin/collateral-pool) via the first-loss mechanism.

<figure><img src="https://410482627-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FyHmskHgMemSDbpsRsSRm%2Fuploads%2FP3QAvvsyRYTSk2wjFbI3%2Fimage_2025-09-09_11-35-23.png?alt=media&amp;token=47e9122e-6712-499f-a217-c9e58e770f0a" alt=""><figcaption></figcaption></figure>

### Core Concept

* **Collateral Pool**: $yzUSD is backed by a pool of assets.
* **Collateral Ratio**: Measures total collateral value relative to $yzUSD supply.
  * Example: A pool worth **$110** backing **100 $yzUSD** gives a **110% ratio**.
  * Ratios above 100% provide a buffer that helps support the 1:1 peg to USD.

***

### Risk Without Protection

Consider a $5 loss in the Collateral Pool:

* Pool drops to **$95**.
* Ratio falls to **95%**, undercollateralized.
* Each $yzUSD is now only backed by **$0.95**.
* This could impact redemptions and the peg.

In this scenario, losses flow directly to $yzUSD holders.

***

### How yzPP Absorbs Losses

The yzPP acts as a **first-loss buffer**:

* A separate pool where participants deposit assets.
* yzPP depositors earn higher rewards in exchange for taking on first-loss risk.

Using the same $5 loss example:

* The **$5 impact is absorbed by yzPP** (e.g., yzPP falls from $10 to $5).
* The **Collateral Pool remains at $105**.
* The ratio stays above 100% (105%), ensuring $yzUSD is still fully backed.
* $yzUSD redemptions continue at **1:1 with USD**.

<table><thead><tr><th width="142.359375">Moment</th><th width="137">Collateral Pool</th><th>yzPP ($ total)</th><th width="110.92578125">yzUSD supply</th><th width="123.25390625">Collateral Ratio</th><th>What happens</th></tr></thead><tbody><tr><td><strong>Start</strong></td><td><strong>$110</strong></td><td><strong>$10</strong></td><td><strong>100</strong></td><td><strong>110%</strong></td><td>System over-collateralised at 110 %</td></tr><tr><td><strong>After $5 loss + first-loss</strong></td><td><strong>$105</strong></td><td><strong>$5</strong></td><td>100</td><td>105%</td><td>yzPP is devalued from $10 to $5 to plug the $5 loss</td></tr><tr><td><em>Without yzPP first-loss mechanism</em></td><td>$95</td><td>-</td><td>100</td><td>95%</td><td>yzUSD no longer fully backed, all yzUSD holders take the loss</td></tr></tbody></table>