4. Redemptions & How the Peg Holds
A description of the redemption process for USDx, and how the peg holds in general under various circumstances.
Last updated
A description of the redemption process for USDx, and how the peg holds in general under various circumstances.
Last updated
The USDx Stablecoin features a set of what are called soft & hard pegging mechanics. Hard mechanics are a set of behaviours which can result in immediate price action which restores the peg. Soft mechanics are those which may or may not present themselves, but which have a slight economic incentive to appear.
Soft Peg Mechanics
A $1 Schelling Point: The more time USDx spends around $1, the more it will be commonly accepted that it is capable of staying around this price point. As a result, the implied value of USDx will be front of mind when encountering things like slippage, and as a result people will be less willing to sell below $1, or buy above $1.
USDx above $1: Users begin taking more debt, to secure a premium when using USDx for leverage (Higher USDx price means more of the leveraged asset can be purchased per unit)
USDx below $1: Users buying cheap USDx to pay off debt
Hard Peg mechanics
USDx significantly above $1: Take out debt to sell USDx back to $1, at such a high value that even an immediately liquidated position presents a profit.
USDx below $1: Buy USDx at a discount on market, and redeem for $1 worth of collateral per unit
The loaning feature has already been covered in 2. Your First Loan & What to Monitor While your Loan is Open, so for this article, we will talk about the Redemption process, how you can participate in it, and also some of the nuances regarding the Redemption Escrow functionality.
A whale has taken a large loan, and chooses to ignore slippage when trading their loaned USDx for another asset. As a result, the price of USDx drops to 90c. You are a savvy user, and compete with other savvy users to buy this below peg USDx. You manage to purchase $10,000 worth of USDx before price rebounds to 98c, and end up with 10,700 USDx units.
You now opt to lock in the arbitrage profit from your purchase, by redeeming 10,700 USDx units, for $10,539.5 worth of Collateral. There is a slight loss in profit here, as we assume a 1.5% redemption fee applied to the redemption.
For most collaterals, it is required to pass through an escrow process during the redemption.
Escrow USDx until the Redemption Cooldown period has elapsed
Complete your escrow by redeeming all queued USDx before the Grace Period causes a timeout
If you fail to complete your redemption in time, you will be charged the Redemption Timeout Fee, which is configured on a per collateral basis. Typically, it will be 1%.
When performing a redemption, it is not always guaranteed that execution will be successful. The minimum debt possible in the USDx system is 1800 USDx. Positions which are smaller than this, must be closed by the redemption completely, otherwise, the redemption attempt is cancelled. Positions which are larger, are capable of being partially redeemed by the redemption. Since redemptions happen in order from least collateralised to most collateralised, this means that there is a chance that the loan at the front of the redemption queue, and your total redeemable amount which is queued, do not match up in a way which allows the redemption attempt to complete gracefully. This results in a cancelation, and your queued USDx may sit in limbo until the grace period expires.
Thankfully, this worst case scenario is limited to a lower bound; it presents itself when the queued amount of USDx is relatively small, and the loan at the front of the redemption ordering is small. As a result, any potential 'unfairly' applied fees, should only be applied to an amount less than $2000. However, still keep in mind that for smaller USDx redemption amounts, it may be a good idea to inspect the loan at the head of the queue, to ensure that your redemption amount is either sufficiently large to close the loan completely, or that the loan itself is large enough to absorb your redemption without falling below the minimum debt requirement of 1800 USDx.
The redemption process opens up an incentive for buying USDx below $1, and ensures that so long as the global/total collateral ratio of the system stays above 100%, that USDx can hold its peg. In addition, the redemption process opens up an attractive arbitrage opportunity which helps to stabilise the protocol, and reward watchful/active users. So long as redemption sizing is managed carefully to avoid paying fees unnecessarily, users can participate as active guardians of the USDx peg, and earn a profit for doing so.
