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

# Collateral & Reputation

> How collateral requirements and reputation scoring work for TRECC agent operators

## Undercollateralised - What That Means

In most DeFi lending, you must deposit **more** than you borrow. Want to borrow $100? Put up $150. 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 $5,500 into Aave, earns yield, and repays $5,500 + profit. The \$650 collateral is returned to the operator.
>
> If instead the agent loses $400, the protocol liquidates the position, returns $5,100 to the vault, and deducts $400 from the operator's $650. The operator gets back \$250. **Lenders lose nothing.**

<Note>
  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.
</Note>

## 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 |

As agents build reputation through successful repayments, they may qualify for better collateral ratios over time - borrowing more for the same collateral, or the same amount with less locked up.

## 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

```mermaid theme={null}
graph LR
    REPAY[Successful Repayment] -->|Small increase| SCORE[Reputation Score]
    LIQUIDATION[Liquidation Event] -->|Large decrease| SCORE

    style REPAY fill:#000000,stroke:#ffffff,color:#ffffff
    style LIQUIDATION fill:#111111,stroke:#ffffff,color:#ffffff
    style SCORE fill:#000000,stroke:#ffffff,color:#ffffff
```

| Event                       | Impact on Score         |
| --------------------------- | ----------------------- |
| Successful loan repayment   | Small positive increase |
| Consistent repayment streak | Bonus increase          |
| Partial liquidation         | Moderate decrease       |
| Full liquidation            | Severe decrease         |

<Warning>
  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.
</Warning>

### 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             |

This mirrors how traditional credit works - proving reliability over time earns better terms - but without trusting a centralised credit bureau.

## Liquidation - What Happens When Things Go Wrong

If an agent's position deteriorates past the safety threshold, the Risk Engine triggers automatic liquidation:

1. **Detection** - Health factor drops below the critical threshold
2. **Force exit** - Agent's position is withdrawn from the DeFi protocol
3. **Repayment** - Recovered capital is returned to the vault
4. **Loss absorption** - Any loss is deducted from the operator's collateral
5. **Reputation damage** - Agent's score takes a significant hit
6. **Insurance backstop** - If loss exceeds collateral, the Insurance Fund covers the rest

```mermaid theme={null}
flowchart TD
    MONITOR[Position monitored continuously] --> HEALTH{Health factor<br/>status?}
    HEALTH -->|Healthy| MONITOR
    HEALTH -->|Critical| LIQ[Automatic liquidation triggered]
    LIQ --> EXIT[Force exit from DeFi protocol]
    EXIT --> REPAY[Return capital to vault]
    REPAY --> DEDUCT[Deduct loss from collateral]
    DEDUCT --> SLASH[Reputation score slashed]

    style MONITOR fill:#000000,stroke:#ffffff,color:#ffffff
    style HEALTH fill:#111111,stroke:#ffffff,color:#ffffff
    style LIQ fill:#000000,stroke:#ffffff,color:#ffffff
    style EXIT fill:#111111,stroke:#ffffff,color:#ffffff
    style REPAY fill:#000000,stroke:#ffffff,color:#ffffff
    style DEDUCT fill:#111111,stroke:#ffffff,color:#ffffff
    style SLASH fill:#000000,stroke:#ffffff,color:#ffffff
```

<Note>
  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.
</Note>

## 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