Redeem

What are redemptions?

BSD redemptions are a protocol mechanism to exchange BSD for sBTC at face value, for example: 1 BSD redeemed for 1 USD worth of sBTC. The sBTC used in redemptions comes from vaults with the lowest interest rates. This assured rate of redemption is how BSD maintains a dollar peg.

How is the dollar peg maintained?

Redemptions help create an incentive based peg mechanism:

• If BSD trades above 1 USD, then it is profitable to borrow BSD and trade it for for another digital asset. This activity increases supply of BSD and will push the price down, towards 1 USD, until the trade is no longer profitable.

• If BSD trades below 1 USD, then it is profitable to buy BSD on the open market and redeem. Redemptions reduce supply which will push price up, towards 1 USD, until the trade is no longer profitable.

In practical reality, you should expect the BSD price to hover, or float, near 1 USD (known as a soft peg) as market participants react to price movements.

How to redeem BSD

• Pick the amount of BSD you want to redeem (10 BSD is the minimum).

• The protocol will quote you how much sBTC you can get for a redemption. The quote will include the redeem fee.

• Sign the transaction to receive the sBTC.

Redemptions require heavy on-chain computation that increases with each vault. So any single redemption can only consume sBTC from a maximum of 10 vaults. You can redeem beyond this limit, you simply need to break your redemption into multiple redemptions.

How does vault ordering work?

Vaults are sorted so the lowest APY vaults can be redeemed first:

• At the start of every epoch the vaults are sorted from lowest to highest APY based on user-selected interest rates.

• New vaults are inserted into the sorted list at the time of creation. Likewise, closed and liquidated vaults are removed.

• Occasionally, vaults are fully redeemed (debt becomes zero) but might temporarily remain in the sorted list. The protocol includes a Keeper function vault::unwind-vault to periodically remove these zero-debt vaults, ensuring redemption efficiency.

What happens if my vault is redeemed?

For each redemption, BSD will be consumed from the vault(s) with the lowest interest rate. If you have the lowest APY vault at this time, you will lose some collateral but your debt will also be reduced accordingly.

You can think of redemptions as someone else repaying your debt and then retrieving an equal amount of your collateral. The upside: This will improve your vault’s collateral ratio – you do not incur a net loss. The downside: You lose exposure to the sBTC.

The maximum collateral that can be redeemed from your vault is the face value of your BSD loan at the current exchange rate (importantly, not all your collateral, since your loan is over-collateralized). The excess collateral can be claimed anytime even if all debt in your vault is redeemed.

When someone redeems from your vault, they pay a redemption fee. This fee reduces the amount of sBTC they receive, meaning some extra sBTC stays in your vault. In effect, the fee becomes a small bonus to your remaining collateral.

Redemptions vs. loan repayment? Same thing?

Paying back your debt is not the same. Repayment is a specific user, repaying debt for a specific vault. Conversely, redemption is an open mechanism. At the protocol level anyone holding BSD, for any reason, can redeem. When you do, you’re redeeming BSD for sBTC from an unspecified vault(s).

How can I avoid being redeemed against?

The best way to avoid being redeemed against is by maintaining a high interest rate relative to other vaults. The lowest APY vaults will be redeemed first.

Redemption examples

Example of a partial Redemption:

• The current price of BTC is $50,000

• Alice's vault has 2 sBTC as collateral and a debt of 50,000 BSD. Her collateral ratio is 200% (100% * (2 * 50,000) / 50,000)

• Bob decides to redeem 25,000 BSD. Alice has the lowest interest rate vault, so the protocol will consume her debt and collateral for redemption.

• Alice's debt is reduced by 25,000 BSD.

• 0.5 sBTC of Alice's collateral is transferred to Bob. (25,000 / 50,000)

• Alice's collateral ratio improves from 200% to 300% (100% * (1.5 * 50,000) / 25,000)

Example of a full Redemption:

• Alice has the same vault as the example above.

• Bob wants to redeem 150,000 BSD for 3 sBTC

• The protocol consumes all of Alice's debt (50,000 BSD)

• 1 sBTC of Alice's collateral is transferred to Bob ($50,000 / 50,000)

• Alice still has 1 sBTC in the vault she can remove anytime or borrow against

• 2 sBTC is still needed to complete Bob's redemption. The protocol continues to consume more vaults until the redemption is complete.