Reserve Pool Deficit-Side Triggers

1. The Symmetric Problem

The surplus-side triggers (Sections 3–7 of this priority) address what happens when the Reserve Pool accumulates excess inventory above target. But the Reserve Pool can also fall below target. A Reserve Pool below target cannot fully serve its primary function as the Phase 1 internal counterparty. If the Active Pool needs rebalancing and the Reserve Pool cannot supply the required stablecoin, Phase 1 settlement fails, the Active Pool remains imbalanced, the skew system spikes to maximum, and the State Engine escalates.

The smart trigger system must therefore handle both directions symmetrically. However, the correct response depends on what caused the deficit, because the two causes require fundamentally different solutions.

2. Two Causes of Reserve Pool Deficit

Cause	Mechanism	Correct Fix
Swap-Driven Deficit	Heavy one-directional user swap flow causes Phase 1 to repeatedly pull stablecoins FROM the Reserve Pool to cover Active Pool deficits. Example: massive USD-to-IDR flow means Phase 1 keeps taking USDT from Reserve USDT Pool to replenish Active USDT Pool.	Phase 2 External Rebalancing (opposite direction). The protocol buys back the short stablecoin from Binance, Wintermute, or OTC. This is standard Phase 2 working in the buy direction instead of the sell direction.
LP Withdrawal-Driven Deficit	LPs withdraw stablecoins from the Reserve Pool, draining actual capital from the protocol. The Reserve Pool shrinks not because of inventory imbalance but because liquidity has left.	Yield Pool Recall. External rebalancing cannot fix this because there is no inventory to trade — capital has physically left the protocol. The only internal source is recalling capital from yield strategies.

Why the Distinction Matters

Swap-driven deficit is an inventory problem. The Reserve Pool is short one stablecoin because it sent it to the Active Pool. The stablecoin still exists in the system (in the Active Pool) and the imbalance will be cleared when Phase 2 buys it back externally. The Yield Pool should NOT be used for this — it would unnecessarily reduce yield-generating capital for a problem that Phase 2 already solves.

LP withdrawal-driven deficit is a capital drain problem. Actual liquidity has left the protocol. Phase 2 cannot fix this because there is no inventory position to trade — the money is simply gone. The Yield Pool is the correct source because it holds idle protocol capital that can be recalled to restore the Reserve Pool buffer.

3. Swap-Driven Deficit: Phase 2 in Reverse

When the Reserve Pool deficit is caused by Phase 1 settlement draining one stablecoin (swap-driven), the existing smart trigger system handles it. The deviation is negative (deficit instead of surplus), but the same tiered threshold logic applies:

Tier	Reserve Pool Deviation	Behaviour	Action
Below Soft	Deficit < Soft Threshold	No action. Natural reverse flow via Phase 1 will likely replenish.	Wait for offsetting user flow.
Soft Zone	Soft ≤ Deficit < Hard	Start cooldown timer (same time-of-day profiles). Phase 2 buy-back fires only if deficit persists at timer expiry.	Cooldown; wait for natural reverse flow.
Hard Zone	Hard ≤ Deficit < Emergency	Phase 2 fires immediately. Buy back the short stablecoin from external partners.	Immediate external buy-back via RFQ/OTC.
Emergency	Deficit ≥ Emergency OR VaR > 80%	Emergency RFQ. Immediate aggressive buy-back.	Emergency RFQ takes over.

The rebalance volume optimisation also applies in reverse: the system buys back to the Target Residual level, not all the way to zero, leaving a buffer against continued same-direction flow.

Buy_Back_Amount = Current_Deficit − Target_Residual
Target_Residual = Soft_Threshold × Residual_Factor (0.3)

4. LP Withdrawal-Driven Deficit: Yield Pool Recall

When the Reserve Pool deficit is caused by LP withdrawals (capital drain), the system uses a separate set of deficit tiers that trigger Yield Pool recall and outflow controls:

Tier	Reserve Pool Level	Action	Rationale
Healthy	> 80% of target	No action. Reserve Pool has sufficient buffer for Phase 1 duties and LP withdrawals.	Normal operating range.
Mild Deficit	60% – 80% of target	Alert Ops. Pause new Yield Pool deployments for this stablecoin. Allow natural deposit inflow to replenish.	Early warning. Stopping yield outflows preserves remaining Reserve capital.
Significant Deficit	30% – 60% of target	Initiate Yield Pool recall (liquid strategies first). Slow LP withdrawal queue ($10K/hr cap). Start deficit cooldown timer.	Active replenishment needed. Yield Pool recall is the primary source.
Critical Deficit	< 30% of target	Aggressive Yield Pool recall (all liquid + semi-liquid strategies). Pause LP withdrawal queue. Ops escalation for external liquidity sourcing if Yield Pool insufficient.	Emergency level. Reserve Pool cannot reliably serve Phase 1. All available internal capital must be mobilised.

4.1 Distinguishing the Cause

The system determines the cause of a Reserve Pool deficit by tracking the source of each balance change:

Balance Change Source	Classification	Tracked Via
Phase 1 settleRebalance() sent stablecoins to Active Pool	Swap-driven deficit	settleRebalance() transaction log; on-chain event
LP withdrawal executed from Reserve Pool	LP withdrawal-driven deficit	WithdrawalExecuted event with source=RESERVE
Both within the same period	Mixed deficit	Proportional attribution based on transaction logs

In the mixed case, both responses can fire simultaneously: Phase 2 buy-back for the swap-driven portion and Yield Pool recall for the withdrawal-driven portion. The two mechanisms do not conflict because they source from different places (external market vs internal Yield Pool).

4.2 Yield Pool Recall Mechanics

When Yield Pool recall is triggered (Significant or Critical LP withdrawal-driven deficit), the recall speed depends on the strategy type:

Strategy Type	Examples	Recall Speed	Recall Priority
Liquid	Lending protocols, liquid staking	Minutes to 1 hour	Recalled first at Significant Deficit
Semi-Liquid	Fixed-term lending, vault strategies	1 – 24 hours	Recalled at Critical Deficit or if liquid strategies insufficient
Illiquid	Locked staking, long-term vaults	1 – 7 days	Recalled only at Critical Deficit as last resort; Ops coordination required

4.3 Interaction with LP Withdrawal Queue

The LP withdrawal-driven deficit tiers directly control the LP Withdrawal Queue state:

Deficit Tier	Queue State	Effect on LP Withdrawals
Healthy (> 80%)	NORMAL	Small withdrawals process from Reserve Pool immediately
Mild Deficit (60–80%)	NORMAL (flagged)	Withdrawals still process; Ops monitors for further deterioration
Significant Deficit (30–60%)	SLOW	Small withdrawals capped at $10K/hour; large withdrawals redirected to Yield Pool
Critical Deficit (< 30%)	PAUSED	All withdrawals from Reserve paused; redirected to Yield Pool; queue resumes when Reserve recovers above 30%

Complete Picture: Surplus vs Deficit

• Surplus Side: Reserve Pool above target due to Phase 1 settlement sending surplus inventory. Solution = Phase 2 external clearance via smart triggers (sell surplus).
• Swap-Driven Deficit: Reserve Pool below target because Phase 1 pulled stablecoins to Active Pool. Solution = Phase 2 external rebalancing in reverse (buy back short stablecoin). Same smart trigger logic applies.
• LP Withdrawal-Driven Deficit: Reserve Pool below target because LPs withdrew capital. Solution = Yield Pool recall + slow/pause LP withdrawal queue. Phase 2 cannot help because this is a capital drain, not an inventory imbalance.

Together, these three responses cover every scenario that can move the Reserve Pool away from target.

5. Interaction with VaR & Skew

5.1 VaR Override

The VaR system from the Reserve Pool VaR priority always takes precedence over the smart trigger system. Regardless of whether a cooldown is active, the current time-of-day profile, or the tier the position is in: if Reserve Pool VaR utilisation exceeds 80%, all cooldown timers are cancelled and Emergency RFQ fires. The smart trigger system does not interfere with VaR-based risk controls.

Additionally, the VaR calculation itself is unaffected by the cooldown. During a cooldown period, the Reserve Pool continues to hold its position, and VaR is calculated on this actual held position. The VaR system does not "know" or "care" that a cooldown is active — it simply evaluates risk based on current exposure.

5.2 Inventory Skew

The Inventory Skew system operates entirely on the Active Pool and is not directly affected by the smart trigger system. During a cooldown period at the Reserve Pool level, the Active Pool continues to experience normal user flow, Phase 1 settlements continue to fire, and the skew system continues to adjust the mid-rate based on Active Pool deviation.

However, the smart trigger system produces indirect benefits for the skew system:

Indirect Benefit	Mechanism
Lower external rebalancing frequency	Fewer Phase 2 executions means less market impact, which means more stable external reference prices, which means the external arbitrage check passes more consistently.
Better LP economics	Reduced COGS from fewer external trades means higher net spread revenue for LPs, which attracts more liquidity, which deepens the Active Pool and makes the skew system more effective.
Smoother Reserve Pool VaR	Natural reverse flow reducing Reserve Pool positions during cooldown produces steadier VaR readings, which means fewer VaR amplification spikes on the skew sensitivity constant k.