Redeem
Redemptions overview
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:
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.
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.
Vault ordering
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 to periodically remove these zero-debt vaults, ensuring redemption efficiency.
Redeem FAQs
Why does the redemption feature exist?
The redemption mechanism exists to help the BSD stablecoin maintain its price peg to the US dollar. It creates a price floor and ceiling through arbitrage opportunities:
If BSD trades below 1 USD, it is profitable for users to buy BSD on the open market and redeem it through the protocol for 1 USD worth of sBTC. This activity reduces the supply of BSD, pushing its price up toward 1 USD.
If BSD trades above 1 USD, it is profitable for users to borrow BSD and sell it. This increases the supply of BSD and pushes the price down toward 1 USD.
Redemptions vs. loan repayment? Same thing?
Paying back your debt is not the same as a redemption.
Repayment is a specific user repaying debt for their own specific vault.
Redemption is an open mechanism available to anyone holding BSD. When you redeem, you are exchanging BSD for sBTC from an unspecified vault (or vaults) that the protocol selects based on having the lowest interest rates.
How does the protocol decide which vault to redeem from?
The protocol targets vaults with the lowest user-set interest rates (APY) first. Vaults in the system are always sorted from lowest to highest APY to facilitate this process.
What happens if my vault is redeemed against?
You can think of a redemption against your vault as someone else repaying your debt in exchange for an equal value of your collateral.
BSD will be consumed from your vault to fulfill the redemption, and your debt will be reduced accordingly.
You will lose some of your sBTC collateral, but this improves your vault’s collateral ratio.
The downside is that you lose exposure to the sBTC that was redeemed from your vault.
Do I lose money if my vault is chosen for redemption?
You do not incur a direct net loss in dollar terms at the time of redemption. The value of the collateral you lose is equal to the value of the debt that is paid off for you. However, you do lose your position in that sBTC, meaning you miss out on any of its potential future price increases.
What is the difference between a partial and a full redemption of my vault?
A partial redemption occurs when the redemption amount is less than your vault's total debt. Only a portion of your debt is cleared, and a corresponding amount of sBTC is taken.
A full redemption occurs when the redemption clears all of your vault's remaining debt. If the redemption amount is larger than your debt, the process continues to the next vault in the queue until the full redemption is complete.
What happens to my collateral if my entire debt is paid off through redemptions?
The maximum collateral that can be redeemed from your vault is equal to the face value of your loan. Since your loan is over-collateralized, you will always have excess collateral left over. This excess sBTC can be claimed by you at any time, even if all the debt in your vault has been redeemed.
How can I avoid being redeemed against?
The best way to avoid being redeemed against is by maintaining a high interest rate on your vault relative to other vaults in the system. The vaults with the lowest APY are always the first to be redeemed from.
Is there a fee for redeeming BSD? Who receives it?
Yes, the user who is redeeming BSD pays a redemption fee. This fee is subtracted from the sBTC they receive, which means a small amount of extra sBTC stays in the vault that was redeemed against. This fee effectively becomes a small bonus to that vault owner's remaining collateral.
What is the lowest redeem fee?
The minimum redemption fee is 0.5%. The fee is calculated from a "base rate" that increases with redemption activity and slowly decays by 6% every hour during periods of no redemptions. This decay mechanism means that fees will be lower when the system has not had recent redemption activity.
How much BSD can I redeem?
Minimum: The minimum amount you can redeem is 10 BSD.
Maximum: A single redemption transaction can only draw collateral from a maximum of 10 vaults. This means the maximum amount for a single transaction is limited by the total debt held in those 10 vaults. To redeem a larger amount, you may need to submit multiple redemption transactions.
Last updated