Obligation enforcement

As has been shown in the previous chapters, the Stable Credit protocol provides means to underwrite network-wide credit risk and absorb predicted defaults by securing the funds required to cover unpaid debt. However, the Stable Credit protocol does not natively collect collateral from members which could be forfeited in the event of a default.

Consequently, a member’s legal obligation to repay debt needs to be contractually formalized off-chain; this contract can then be acted on if a member fails to meet their obligations. It is recommended that such contracts specify that unpaid Stable Credit debt converts into debt due in the network’s Reserve Currency at the payment due date. Such a clause helps to support Stable Credits’ soft peg, as will be shown in the next chapter.

Nevertheless, it should be noted that the Stable Credit protocol does not rely on funds retrieved from defaulters in order to remain stable and solvent. The uncollateralized nature of Stable Credit loans is taken into account by the AssurancePool, AssuranceOracle, and the CreditIssuercontract as they predict credit risk, set the Reserve Target and assign fees - hence risk is priced appropriately.

Reserve Currency Repayment

Members who wish to avoid default may also fulfill their outstanding obligations with payments made in the network’s Reserve Currency.

Reserve Currency repayments are transferred to the Network Reserve and the corresponding amount of their credit balance is written off to the Network Debt Account. Funds stored in the Assurance Pool are then used to rectify the circulating Stable Credit supply accordingly.