Redemption

Redemption is a mechanism that allows nUSD holders to exchange their nUSD directly for collateral from the protocol at a slight discount. This feature helps maintain the peg of nUSD to $1 and provides an exit mechanism for nUSD holders.

How Redemption Works

Redemption is the process of exchanging nUSD for collateral at face value. When you redeem nUSD:

1. You select an amount of nUSD to redeem

2. The protocol identifies eligible vaults that have opted in as redemption providers

3. Your nUSD is used to repay debt from these vaults, starting with the lowest collateralization ratio

4. In return, you receive equivalent collateral value minus a small redemption fee

5. The redemption fee is paid to the redemption provider

For example, if you redeem 1,000 nUSD and the redemption fee is 0.5%, you would receive collateral worth 995 nUSD (1,000 nUSD minus the 0.5% fee).

Redemption allows you to exchange nUSD for underlying collateral at face value (minus fees), providing an arbitrage opportunity when nUSD trades below its peg.

Redemption Process

To redeem nUSD for collateral:

1. Connect your wallet to the Unstable Protocol dApp

2. Navigate to the "Redeem" section

3. Select the type of collateral you want to receive

4. Enter the amount of nUSD you want to redeem

5. Review the amount of collateral you'll receive after fees

6. Confirm the transaction

Redemption Fees

A redemption fee is applied when you redeem nUSD for collateral. In the Unstable Protocol:

• The standard redemption fee is 0.5% of the redeemed amount

• This fee is paid directly to the redemption provider whose collateral you're redeeming

• The fee compensates providers for offering their collateral for redemption

For example, if you redeem 1,000 nUSD:

• 5 nUSD (0.5%) goes to the redemption provider as a fee

• You receive collateral worth 995 nUSD

The fee structure is designed to:

1. Incentivize users to become redemption providers

2. Provide an arbitrage opportunity when nUSD trades below its peg

3. Ensure the system maintains sufficient redemption capacity

Redemption Order

Redemptions target user vaults in order of their collateralization ratio, starting with the lowest ratio first. This means:

1. The most vulnerable positions are redeemed first

2. Users with higher collateralization ratios are less likely to be affected

3. The overall health of the system improves after redemptions

Benefits of Redemption

The redemption mechanism provides several benefits:

• Peg maintenance: Creates a price floor for nUSD

• Exit mechanism: Allows nUSD holders to exit their position directly through the protocol

• System health: Improves the overall collateralization of the system

• Arbitrage opportunity: Provides profit potential when nUSD trades below its peg

Becoming a Redemption Provider

As a borrower in the Unstable Protocol, you can choose whether to provide rigid redemption services:

1. You must have an active borrowed position (debt) in nUSD

2. You can opt in to become a redemption provider through the protocol interface

3. When you activate the redemption provider option, it allows other users to redeem nUSD against your collateral

4. During redemption, you will:

   • Lose a portion of your collateral

   • Have your debt reduced by the equivalent amount of nUSD

   • Earn the redemption fee (0.5% by default)

Benefits of Being a Redemption Provider

• Earn fees: Collect a 0.5% fee whenever someone redeems nUSD against your collateral

• Debt reduction: Your nUSD debt is reduced without you having to actively repay it

• Improved collateral ratio: After partial redemptions, your collateral ratio typically increases, making your position safer

Redemption Examples

Example of a partial redemption:

• You deposit 3 ETH ($4,500) as collateral and borrow 3,000 nUSD (150% collateral ratio)

• Someone redeems 1,500 nUSD against your position with a 0.5% redemption fee

• You receive 7.5 nUSD as the fee (0.5% of 1,500)

• Your debt is reduced to 1,500 nUSD

• Your collateral is reduced by approximately 0.995 ETH (worth 1,492.5 nUSD)

• Your new collateral ratio is 200% (2.005 ETH worth $3,007.5 / 1,500 nUSD)

Example of a full redemption:

• Using the same initial position (3 ETH, 3,000 nUSD debt)

• Someone redeems 3,000 nUSD against your position

• You receive 15 nUSD as the fee (0.5% of 3,000)

• Your debt is fully paid off

• Your collateral is reduced by approximately 1.99 ETH (worth 2,985 nUSD)

• You retain approximately 1.01 ETH of your original collateral

Considerations When Redeeming

Before redeeming nUSD, consider:

• Slippage: The actual amount of collateral received may vary based on price fluctuations

• Gas costs: Redemption involves multiple operations and may require significant gas

• Minimum redemption amount: There may be a minimum amount of nUSD required for redemption

• Available collateral: Redemption is limited by the available collateral from opted-in providers