Loss Absorption Capacity

Evaluates whether an explicit, liquid backstop exists and how it is activated. The size, transparency, and activation mechanism of the backstop are the primary inputs; the top tier requires autonomous on-chain trigger rules rather than governance-vote activation.

Tier	Reasoning	Evidence
No meaningful backstop	A protocol with no meaningful backstop transmits losses directly to downstream holders with no recovery mechanism.	The Resolv RLP impairment (March 2026) demonstrates how absence of a meaningful backstop transmits losses directly to holders — RLP price reset to 0.71 USDC, with no recovery mechanism.
Limited cover, or governance-vote activation	A backstop with no autonomous trigger relies on a governance vote to activate, introducing latency precisely when speed matters. Named backstops that depend on governance-vote activation sit in the middle band even when adequately sized, because the activation path is the binding constraint.	Aave's legacy Safety Module was never triggered despite multiple bad-debt events because political incentives blocked slashing — the governance-vote activation path was the binding constraint.
Large transparent safety module with autonomous trigger	An explicit, on-chain, liquid backstop sized for tail-risk absorption with autonomous on-chain trigger rules fires mechanically when conditions breach the threshold, eliminating both the activation delay and the political pressure to delay.	Aave's Umbrella redesign (2025) replaced governance-vote activation with automatic slashing once bad debt exceeds a preset threshold, anchoring the top tier.