yzPP First-Loss Mechanism

yzPP provides a layer of protection to the yzUSD Collateral Pool via the first-loss mechanism.

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.

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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.

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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.

Moment	Collateral Pool	yzPP ($ total)	yzUSD supply	Collateral Ratio	What happens
Start	$110	$10	100	110%	System over-collateralised at 110 %
After $5 loss + first-loss	$105	$5	100	105%	yzPP is devalued from $10 to $5 to plug the $5 loss
Without yzPP first-loss mechanism	$95	-	100	95%	yzUSD no longer fully backed, all yzUSD holders take the loss