Protection Band (Phase 2)

⚠️ Implementation Status: PLANNED

The Protection Band mechanism described in this document is part of the Phase 2 roadmap. Current contract implementation does not include automated TWAP monitoring or T+0 suspension triggers. Manual risk control via keeper roles is available in the current release.

Weakly Coupled Pricing Model

PP maintains two concurrent prices:

Price Type	Description	Determination
NAV	Net asset value per share within Prime Vault	Audit/reconciliation inputs
P_mkt	Market trading price in the DEX pool	Supply and demand

Objectives

• Long-term: P_mkt fluctuates around NAV

• Short-term: Allow premiums/discounts to exist, reflecting liquidity premiums and risk pricing

Why Not Enforce 1:1 Pegging?

1. Forced pegging requires infinite liquidity support—unrealistic for alternative assets

2. Premiums/discounts themselves serve as useful risk signals

3. Arbitrageurs converge spreads within rules, naturally building liquidity depth

Protection Band Parameters

Initial protection band: ±15%

Defining Deviation

$$D_t=\left|\frac{P_{\text{mkt}}}{\mathrm{NAV}_t}-1\right|$$

Price sampling uses TWAP (Time-Weighted Average Price) to prevent single-point manipulation.

Trigger Actions

When D_t ≥ 15%:

Action	Explanation
Automatically suspend T+0	Emergency Redemption Channel Closed
T+7 remains open	Standard redemptions remain unaffected
Queued redemptions maintained	Queue processing continues

Resumption Conditions

1. Deviation returns within protection band (D_t < 15%)

2. Multi-signature risk control confirms no ongoing manipulation

State Diagram

┌─────────────────────────────────────┐
│             Normal State            │
│          D < 15%, T+0 Open          │
└──────────────────┬──────────────────┘
                   │ D ≥ 15%
                   ↓
┌─────────────────────────────────────┐
│           Protected State           │
│         D ≥ 15%, T+0 Paused         │
└──────────────────┬──────────────────┘
                   │ D < 15% AND Risk Check OK
                   ↓
┌─────────────────────────────────────┐
│        Return to Normal State       │
└─────────────────────────────────────┘

Design Logic

The protection band interrupts the death spiral of:

Discount → Panic → Run → Greater Discount → ...

By suspending T+0 rather than full redemptions:

• User exit paths are preserved (T+7 and Queue remain open)

• Instant arbitrage opportunities are eliminated

• Time is created for market to absorb information

• System stability is maintained without total lockup

TWAP Implementation

Why TWAP?

Single-point price readings are vulnerable to manipulation:

• Flash loan attacks

• Sandwich attacks

• Low-liquidity periods

TWAP Parameters

Parameter	Value	Rationale
Window	1 hour	Balance between responsiveness and manipulation resistance
Sample frequency	Every block	Capture all price movements
Outlier exclusion	Top/bottom 5%	Remove manipulation attempts

Emergency Scenarios

Scenario: Sudden Large Discount

1. Market price drops sharply (e.g., -20%)

2. D_t exceeds 15% threshold

3. T+0 channel automatically suspends

4. Users can still exit via T+7 or Queue

5. Arbitrageurs buy cheap PP

6. Price gradually recovers

7. When D_t < 15%, T+0 resumes

Scenario: Manipulation Attempt

1. Attacker tries to crash price

2. TWAP smooths the attack signal

3. If TWAP still triggers protection band:

   • T+0 suspends (blocking instant arbitrage)

   • Risk control team investigates

   • Resume only after confirmation of no manipulation

Governance Parameters

Parameter	Default	Governance Adjustable
Protection band width	±15%	Yes
TWAP window	1 hour	Yes
Resume threshold	D < 15%	Yes
Multi-sig requirement	3/5	Yes (for emergency override)