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Chapter 4 · § 4.2 · Recipe

The 15% Cap

The parameter that closes the Terra loop.

By · Originally published April 2026 · Next review October 2026 · ~5 min

Problem

How much of the protocol's collateral can come from the protocol's own token? The answer to this single question is the difference between Terra's failure mode and a protocol whose worst case is bounded.

Solution

No more than 15% of total backing collateral may be SZK.

The cap is enforced in code, at the issuance layer, and cannot be raised by governance. It applies to total backing collateral across all positions; it is not a per-position constraint that can be aggregated around.

✦ Tip If you remember nothing else about the GCSR, remember the cap. It is the difference between a ladder and a ramp.

Discussion

This is the parameter that closes the Terra loop. Without a cap, dilution is unbounded — the protocol can in principle continue minting SZK to defend the peg until SZK price reaches zero, at which point the dilution mechanism has no defensive power and the peg breaks anyway. Unbounded is the failure mode.

The 15% figure was selected from a sensitivity analysis across the bounded-dilution proof: the parameter that produces the smallest worst-case dilution while still allowing meaningful Layer 4 defensive capacity. Lower than 15% reduces defensive capacity unnecessarily. Higher than 15% widens the worst-case bound.

△ Warning A protocol that announces a cap but reserves the right to raise it under stress has not made the commitment. The cap has to be in code with no admin function. Otherwise the cap exists only until the moment the cap matters.

See Also

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