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.

How does U.AVAX closely follow the price of USD?

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.

What are redemptions?

Users can redeem their U.AVAX for AVAX at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

Is a redemption the same as paying back my debt?

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.

How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula baseRate * AVAXdrawn

How is the baseRate calculated?

Redemption 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:

  • baseRate is decayed based on time passed since the last fee event

  • baseRate is 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

As a borrower, do I lose money if I'm redeemed against?

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.

How can I avoid being redeemed against?

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.

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