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Please note that the text in the following chapter describes risk management in the standard configuration of the Stable Credit protocol. For examples of different configurations, including different fee structures and Reserve policies, go to Configurability.
The Stable Credit protocol underwrites credit risk by collecting transaction fees from members and storing them in its network Assurance Pool. These transaction fees are normally paid in the network’s Reserve Currency, and not in Stable Credits. Members pay individualized fees according to the predicted risk that they introduce into a particular network.
If a member fails to rebalance their indebted account according to the terms set by the Credit Issuer, their outstanding debt is written off to the Network Debt Account, and is covered by funds accumulated in the Reserve.
In order to ensure that reserved funds always suffice to underwrite actual network risk, the total amount of fees charged from members and the share of fee proceeds captured by the Assurance Pool is constantly calculated by the Assurance Oracle infrastructure. In order to perform the calculations necessary to predict risk, the Stable Credit protocol relies on a decentralized Assurance Oracle which continuously collects and monitors data associated with network-wide risk. This analysis is then used to update network risk variables accordingly.
As a result, the Stable Credit protocol ensures that fee proceeds can only be withdrawn by operators after it has been made sure that reserved funds suffice to underwrite predicted network risk. Once this goal has been achieved, incoming proceeds can be withdrawn by operators at will.