6.5.1 Socialized clawbacks

Socialized clawbacks on ChopSui are a mechanism designed to protect the platform and its users from significant losses in extreme market scenarios or when there are insufficient funds to cover negative balances in certain pools. It is important to note that the concept of socialized clawbacks is not specific to ChopSui but is a general practice in some decentralized exchanges and platforms.

When an event occurs that results in losses or negative balances in a specific pool on ChopSui, the platform may initiate a socialized clawback. This means that the losses are proportionally distributed among the participants in that particular pool.

Here's an explanation of how socialized clawbacks work on ChopSui:

1. Loss Event: Let's assume there is a severe market crash or a large unexpected event that causes significant losses in a specific pool on ChopSui.

2. Negative Balances: As a result of the loss event, the pool may have negative balances, meaning the value of the assets held in the pool is not sufficient to cover all the outstanding positions.

3. Proportional Distribution: To address the negative balances, ChopSui implements a socialized clawback mechanism. The losses are proportionally distributed among the users who had positions in the affected pool at the time of the event. The distribution is based on the size of each user's position relative to the total size of the pool.

4. Loss Allocation: The losses are allocated by reducing the balances or holdings of the affected users in a proportionate manner. This ensures that each user bears a portion of the losses based on their exposure to the pool. The reduction in balances or holdings helps to restore the overall pool balance and address the negative balances.

5. Transparency and Communication: ChopSui aims to maintain transparency throughout the socialized clawback process. Users are typically notified about the event, the need for a clawback, and the actions being taken. Clear communication is provided to ensure users understand the impact and steps taken to mitigate the losses.

Socialized clawbacks are intended to distribute the impact of severe losses among the participants in a pool, preventing a single user or a small group from shouldering the entire burden. By implementing this mechanism, ChopSui aims to protect the overall stability of the platform and foster a fair and balanced environment for all users.

It's important for users to be aware of the potential risks associated with socialized clawbacks and carefully consider the pools they participate in and the potential impact of such events.