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Redemptions and U.Token Price Stability
Note: To facilitate the elaboration of how it works, we will use the AVAX collateral as an example, other collateral works the same as it.
The ability to redeem U.AVAX for AVAX at face value (i.e. 1 U.AVAX for $1 of AVAX) and the minimum collateral ratio of
110% create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes. U.AVAX also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Stabilize treats U.AVAX as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying U.AVAX is below $1), so too does the
baseRate — making borrowing less attractive which keeps new U.AVAX from hitting the market and driving the price below $1.
Users can redeem their U.AVAX for AVAX at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
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 * AVAXdrawnRedemption fees are based on the
baseRate state variable in Stabilize, which is dynamically updated. The baseRate increases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of U.AVAX.Upon each redemption:
baseRateis decayed based on time passed since the last fee eventbaseRateis incremented by an amount proportional to the fraction of the total U.AVAX supply that was redeemed- The redemption fee is given by
baseRate * AVAXdrawn
If your Trove is redeemed against, you do not incur a net loss. A redemption is the process of exchanging U.AVAX for AVAX at face value, as if 1 U.AVAX is exactly worth $1. That is, for x U.AVAX you get x Dollars worth of AVAX in return.owever, you will lose some of your AVAX 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.
Last modified 2yr ago