> ## Documentation Index
> Fetch the complete documentation index at: https://docs.hylo.so/llms.txt
> Use this file to discover all available pages before exploring further.

# Additional Risk Management

> Understanding Hylo V2's additional risk management mechanisms and metrics

Autonomous [collateral rebalancing](/protocol-overview/collateral-rebalancing) is Hylo's first line of defense: as a pool's CR drifts out of the Neutral band, the protocol opens subsidized swap routes that pull it back. The mechanisms below are the additional layers that protect the peg when rebalancing alone is not enough, for example during a sharp, sustained drawdown.

## Layered Protection

Each pool carries the same independent stack of protections. Layers engage progressively as a pool's [rebalance zone](/technical-addendum/hylo-equations#rebalance-zones) deteriorates.

| Layer | Mechanism                                      | Engages                                         |
| ----- | ---------------------------------------------- | ----------------------------------------------- |
| 1     | Autonomous rebalancing routes                  | Outside the Neutral band (CR \< 135% or > 165%) |
| 2     | Zone-based xASSET fee schedule                 | Sell zones (CR \< 135%)                         |
| 3     | Stablecoin mint gating                         | Whenever a mint would leave the Neutral band    |
| 4     | Earn Pool loss absorption (burn to restore CR) | Destabilized (CR \< 100%)                       |

On top of these CR-driven layers, two always-on invariants (a per-pool virtual stablecoin floor and a levercoin market-cap limiter) bound how far any pool can be pushed.

## Anti-Destabilization Fees

xASSET (levercoin) mint and redeem fees are tiered by rebalance zone. In normal operation they are flat and low; as CR falls into the sell zones, **redeem fees rise steeply while mint fees fall**:

| Zone                    | Mint / Redeem (example)      |
| ----------------------- | ---------------------------- |
| Neutral & buy zones     | 100 / 100 bps                |
| Sell Zone 1 (120%–135%) | 50 / 400 bps                 |
| Sell Zone 2 (100%–120%) | 0 / 800 bps                  |
| Destabilized (\< 100%)  | minting & redemption blocked |

This schedule is an **anti-destabilization backstop, not a routine cost**. It makes it prohibitively expensive for a single large redemption to abruptly drag a pool's CR down, while the discounted mint fee rewards restorative flow. In normal conditions, autonomous rebalancing keeps CR inside the Neutral band, so these elevated fees almost never apply.

## Earn Pool as First-Loss Capital

The Earn Pool plays two distinct roles.

**During rebalancing**, it settles the profit or subsidy of each swap: profitable rebalances mint hyUSD into the pool, subsidized ones burn hyUSD from it (see [Profit and Loss Settlement](/protocol-overview/collateral-rebalancing#profit-and-loss-settlement)).

**In the Destabilized zone (CR \< 100%)**, the pool can no longer fully back its virtual stablecoin. The protocol burns Earn Pool hyUSD to retire the unbacked virtual-stablecoin **overhang**, lowering supply and lifting CR back toward 100%. The burn is capped at the Earn Pool's balance, and the amount retired is recorded as debt on a **pool drawdown ledger**.

This is a last-resort backstop, not part of normal operation. The protocol is designed so that [collateral rebalancing](/protocol-overview/collateral-rebalancing) keeps each pool balanced long before CR ever approaches 100%. The Earn Pool burn exists only to absorb an extreme event that rebalancing could not contain.

While a drawdown is outstanding:

1. **Stablecoin minting is frozen** for that pool until the debt is fully repaid.
2. **Yield harvesting pauses**: in the sell zones and the Destabilized zone, the epoch harvest is a no-op, so the protocol does not distribute yield out of a stressed pool.
3. Once CR recovers, **future harvested yield repays the drawdown first**, before Earn Pool depositors resume compounding.

This makes Earn Pool depositors the protocol's first-loss capital: they earn the system's aggregate yield in calm conditions and have their hyUSD burned to recollateralize a pool when one falls below 100% backing.

## Multi-Pool Risk Isolation

V2's independent pools mean stress is contained:

* Each pool has its own CR, rebalance zone, fee schedule, and drawdown ledger.
* A broad market selloff can stress all pools at once, but an asset-specific shock stays isolated to its pool.
* hyUSD remains backed by the healthy pools while a stressed pool works through its own protection layers.