Undercollateralised - What That Means
In most DeFi lending, you must deposit more than you borrow. Want to borrow 100?Putup150. That’s overcollateralisation - safe but capital-inefficient.
TRECC flips this. Agents post a fraction of what they borrow, with the remaining risk managed by execution constraints, automated liquidation, and insurance. This lets agents access meaningful capital without locking up equivalent value.
Collateral - An Example
An operator deposits $650 in collateral.
Based on the protocol’s requirements, this qualifies the agent to borrow up to $5,500 in USDC from the vault.
The agent deploys 5,500intoAave,earnsyield,andrepays5,500 + profit. The $650 collateral is returned to the operator.
If instead the agent loses 400,theprotocolliquidatestheposition,returns5,100 to the vault, and deducts 400fromtheoperator′s650. The operator gets back $250. Lenders lose nothing.
Collateral requirements scale with the loan size - smaller loans need less collateral, larger loans need more. The exact ratio is enforced by the Risk Engine’s on-chain logic.
How Collateral Requirements Scale
The protocol uses a tiered model. Without getting into the exact math:
| Borrowing Tier | Collateral Needed | Who qualifies |
|---|
| Small loans (testing, new agents) | Minimal flat fee | Any registered agent |
| Medium loans | Base fee + percentage of amount | Agents with some reputation |
| Large loans | Base fee + higher percentage | Established agents with strong track record |
The Reputation System
Every TRECC agent has an on-chain reputation score that tracks its borrowing history. This score is:
- Public - anyone can verify it on-chain
- Immutable - past actions cannot be erased
- Asymmetric - losses hurt far more than gains help
How the Score Changes
| Event | Impact on Score |
|---|
| Successful loan repayment | Small positive increase |
| Consistent repayment streak | Bonus increase |
| Partial liquidation | Moderate decrease |
| Full liquidation | Severe decrease |
A single liquidation can erase the reputation gains from 50 or more successful repayments. This asymmetry is deliberate - it creates a powerful incentive for operators to prioritise safety over aggressive yield-chasing.
What Reputation Unlocks
Higher scores translate to concrete benefits:
| Reputation Level | Borrowing Capacity | Collateral Requirements |
|---|
| New (baseline) | Small loans only | Highest collateral ratio |
| Established | Standard borrowing | Standard ratio |
| Trusted | Large loans available | Reduced ratio |
| Elite | Maximum capacity | Lowest ratio |
Liquidation - What Happens When Things Go Wrong
If an agent’s position deteriorates past the safety threshold, the Risk Engine triggers automatic liquidation:
- Detection - Health factor drops below the critical threshold
- Force exit - Agent’s position is withdrawn from the DeFi protocol
- Repayment - Recovered capital is returned to the vault
- Loss absorption - Any loss is deducted from the operator’s collateral
- Reputation damage - Agent’s score takes a significant hit
- Insurance backstop - If loss exceeds collateral, the Insurance Fund covers the rest
Liquidation is not the end. An agent can continue operating after liquidation - it just has reduced reputation (meaning smaller loans and higher collateral requirements) until it rebuilds trust through consistent repayments.
The Operator’s Incentive Structure
As an operator, your incentives are aligned with the protocol’s safety:
- Upside - your agent earns yield, builds reputation, and unlocks larger borrowing capacity over time
- Downside - liquidation costs you collateral AND reputation, making future borrowing harder and more expensive
- Rational behaviour - conservative strategies that consistently repay outperform aggressive strategies that occasionally get liquidated
