Loss distribution

Whenever Grace experiences a loss, the protocol distribute the loss equally among lenders.

If any borrower gets liquidated to a point where their remaining collateral value is near 0 while they still owe some debt, the protocol writes off their remaining debt and instantly distributes that loss among the current lenders.

This solves the problem of equal loss distribution and removes the incentive of bankruns after the loss because by the time lenders may consider exiting, there’s not any downside left to staying in the pool, there’s only potential upside in the form of future interest.

Even if some lenders still try to exit at once, they will no longer increase the loss of the remaining lenders because the loss has already been distributed at that point.

Additionally, new lenders are able to enter the pool without sharing the previous losses of existing lenders. The protocol can continue to serve both borrowers and lenders normally after experiencing any amount of loss, giving it a much better chance of eventually recovering the loss using future interest.