Collateral Liquidation Mechanism

In cases where an underlying asset defaults or fails to meet repayment obligations, Pi Protocol initiates a structured liquidation process to protect system solvency.

• When a vault-backed position (e.g., IIA or private note) misses a payment or crosses a risk threshold, it is marked for default.

• The haircut previously applied acts as the first loss absorber.

• If losses exceed the haircut, the Loss Reserve Pool covers the shortfall.

• The affected note is then locked or written down within the protocol, and future yield accrual is stopped.

If the position is part of a rolling maturity cycle, the protocol automatically redeems the defaulted note and replaces it with a new position, if approved. All liquidation outcomes are recorded in the vault and reflected in the valuation of USI tokens.
Redemption rights are preserved, but affected users may experience reduced returns depending on the extent of default recovery. This mechanism ensures that USP stability is preserved even under adverse conditions.