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A redemption is the process of exchanging USDE for collateral at face value, as if 1 USDE is exactly worth $1. That is, for x USDE you get x Dollars worth of collateral in return.
Users can redeem their USDE for collateral at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
For example, if the current redemption fee is 1%, the price of collateral is $500 and you redeem 100 USDE, you would get 0.198 collateral (0.2 collateral minus a redemption fee of 0.002 collateral).
Of course, this example is simple. In fact, there are likely to be multiple collaterals in the Trove. When performing a redemption operation in a trove, if a partial redemption occurs, it is necessary to choose which assets are redeemed first, so we define a priority in the protocol, and the current order is rETH, stETH, ETH, that is The priority is to start redemption from rETH.
Note that the redeemed amount is taken into account for calculating the base rate and might have an impact on the redemption fee, especially if the amount is large.
When USDE is redeemed, the collateral provided to the redeemer is allocated from the Trove(s) with the lowest collateral ratio (even if it is above
110%). If at the time of redemption you have the Trove with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The USD value by which your collateral is reduced corresponds to the nominal USDE amount by which your Trove’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Troves, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Trove’s debt are called full redemptions. In such a case, your Trove is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
When performing a redemption operation in a trove, if a partial redemption occurs, it is necessary to choose which assets are redeemed first, so we define a priority in the protocol, and the current order is rETH, stETH, ETH, that is The priority is to start redemption from rETH.
Let’s say you own a Trove with 1
stETHcollateralized and a debt of
3,200 USDE. The current price of ETH is
$2,000.the curent price of stETH is
1 (In fact, it may be more accurate to call it the price ratio of stETH and ETH, which is provided by the oracle). This puts your collateral ratio (CR) at
125% (= 100% * (1 * 2,000 + 1 * 1 * 2000) / 3,200). Let’s imagine this is the lowest CR in the ERD system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
1,200 USDEand thus repays
1,200 USDEof your debt, reducing it from
2,000 USDE. In return,
$1,200, is transferred from your Trove to the redeemer. Your collateral will become
1 ETHwhile your collateral ratio goes up from
140% (= 100% * (1 * 2000 + 0.4 * 1 * 2,000) / 2,000).
Example of a full redemption
6,000 USDE. Given that the redeemed amount is larger than your debt minus
200 USDE(set aside as a Liquidation Reserve), your debt of
3,200 USDEis entirely cleared and your collateral gets reduced by
$3,000of collateral, leaving you with a collateral of
0.5 ETH (1stETH * 1 * 2000 + 0.5 * 2000 = $3000).
No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Trove's debt and collateral.
Under normal operation, the redemption fee is given by the formula
(baseRate + 0.25%) * Collateraldrawn
When a user redeems another user's Trove, they will be charged a certain redemption fee, and they will also inherit the total debt of the redeemed Trove (including interest, see the document for details).
Redemption fees are based on the
baseRatestate variable in ERD, which is dynamically updated. The
baseRateincreases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of USDE.
Upon each redemption:
baseRateis decayed based on time passed since the last fee event
baseRateis incremented by an amount proportional to the fraction of the total USDE supply that was redeemed
- The redemption fee is given by
(baseRate + 0.25%) * Collateraldrawn
If your Trove is redeemed against, you do not incur a net loss. However, you will lose some of your collateral exposure. Your Trove's collateral ratio will also improve after a redemption.
The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Trove's in the system. Remember: The riskiest Troves (i.e. lowest collateralized Troves) are first in line when a redemption takes place.