What Are the Mechanisms Used by Protocols to Recapitalize after a Significant Collateral Impairment Event?

Protocols often use emergency measures such as issuing new debt or equity (tokens) to raise funds. This could involve an auction of newly minted governance tokens to external investors for stablecoins, or activating a pre-funded 'safety module' or 'insurance fund' to cover the shortfall.

In extreme cases, a protocol may require a 'bail-in' where existing token holders or creditors absorb some of the losses.