FAQs
Last updated
Last updated
For more info see the risks section: FAQs
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
In the Based Protocol, you set your own interest rate primarily to manage your vault's risk of redemption. Your chosen rate determines your vault's position in the redemption queue; vaults with lower rates are redeemed first. This allows you to balance the cost of your loan against your desired level of safety from being redeemed against.
Epochs: Rates are locked for fixed periods called epochs, which last approximately one week (1008 Bitcoin blocks).
Payments: Interest payments are calculated per block and are paid in BSD by being added to your vault's total debt.
Accrual: While calculated per block, interest is formally accrued and added to your debt whenever an action is taken on your vault (like borrowing or repaying). All vaults are also accrued every two weeks to align with the start of a new epoch.
Your choice should be based on your personal risk tolerance and current market conditions. A higher interest rate provides a larger "Redemption Buffer," making it less likely your vault will be redeemed against. You should monitor the distribution of interest rates across other vaults to inform your decision.
The Redemption Buffer is the amount of global debt from other vaults that would need to be redeemed before your specific vault would be affected. For example, if your vault has a 2% APY and 50% of all debt in the system has a lower interest rate, your Redemption Buffer would be 50%.
Yes, you can adjust the interest rate for your vault at any time. However, the new rate will only take effect at the start of the next epoch. The rate for the current epoch is locked in.
Minimum APY: 1%
Maximum APY: 100%
Interest payments are added to your vault's debt, which will slowly reduce your collateral ratio (CR) over time. You should monitor this and can periodically repay debt or add more collateral to counteract this effect.
The protocol allows you to delegate the management of your vault's interest rate to another trusted Stacks principal, such as a friend or an automated service. This delegate can then update your interest rate for you. You can still update the rate yourself and can revoke the delegation at any time.
You should only delegate to principals you fully trust. A malicious or negligent delegate could put your vault at risk by:
Setting your rate too high, causing your debt to grow quickly and potentially leading to liquidation.
Setting your rate too low, causing your vault to be redeemed against.
When you borrow BSD you’re utilizing the liquid value of your Bitcoin without selling. In practice there are a few common reasons why Bitcoin holders typically do this:
Use BSD to buy other digital or real world assets.
Sell BSD to buy more Bitcoin (leverage). This can be risky and we do not recommend it.
Secure BSD by providing BSD to the Stability Pool in exchange for rewards.
Redeem 1 BSD for 1 USD worth of sBTC.
sBTC secures your collateral via a network of industry leading institutional validators. These signers are responsible for approving all sBTC deposit and withdrawal operations, ensuring the integrity of the system.
For more info on liquidations see Collateral
For more info see Interest rates
For more info see Interest rates
For more info see Interest rates
sBTC is a programmable form of Bitcoin that serves as collateral within the Based Protocol on the Stacks blockchain. It is decentralized and secured by Stacks miners. The easiest way to get sBTC is to migrate some L1 BTC here:
What type of collateral can I use to borrow BSD?
The Based Protocol is a Bitcoin-only system. It exclusively uses sBTC, a programmable form of Bitcoin on the Stacks blockchain, as collateral.
How is my collateral kept safe?
Your sBTC collateral is locked in a non-custodial smart contract on the Stacks blockchain. It is not held by a traditional custodian but is instead secured by a decentralized network of Stacks miners and validators. The system is designed so that your funds are only subject to the rules set forth in the smart contract code, not the interference of any person or entity.
What is a "collateral ratio" (CR)?
A collateral ratio is the ratio of the dollar value of your locked sBTC collateral to the dollar value of your borrowed BSD debt. For example, if you have $2,000 worth of sBTC as collateral and a debt of 1,000 BSD, your collateral ratio is 200%.
What is the minimum collateral ratio for my vault?
Under normal operating conditions, the minimum collateral ratio (MCR) is 110%. Your vault must remain above this level to avoid being liquidated. This is also known as a 90.9% loan-to-value (LTV) ratio.
Can I add more collateral to my vault later?
Yes, you can add more sBTC collateral to your vault at any time.
Am I able to withdraw some of my collateral?
Yes, you can withdraw sBTC from your vault as long as the vault's collateral ratio remains at or above 110% after the withdrawal.
What is the "global collateral cap"?
The global collateral cap is a system-wide limit on the total USD value of sBTC that can be deposited as collateral across all vaults in the protocol. When creating a new vault or adding collateral, the new deposit cannot cause the system to exceed this cap.
How does a "redemption" affect my collateral?
If your vault is redeemed against, you lose a portion of your sBTC collateral. The amount of collateral taken is equal in value to the amount of your debt that is repaid by the redeemer.
How does a liquidation affect my collateral?
When the value of your sBTC falls below 110% of the value of your borrowed BSD, you will no longer be able to retrieve your collateral by repaying your debt. Your vault will be liquidated by the Stability Pool or through redistribution. Your entire sBTC collateral is transferred away, and you lose access to it. You will still keep the BSD you originally borrowed. Because the liquidation happens when your collateral is worth ~110% of your debt, your net loss in immediate dollar terms is about 9.09%.
Why would my collateral amount change without me doing anything?
Your vault's collateral amount can increase if the system enters a "Redistribution" state. This is a rare event that happens when vaults are liquidated while the Stability Pool is empty. In this case, your vault will receive a proportionate share of both the collateral and the debt from the liquidated vaults.
The Stability Pool provides the upfront liquidity needed to repay the debt from liquidated vaults, ensuring that the total supply of BSD always remains over-collateralized. When a vault is liquidated, an amount of BSD from the pool is burned to cover the vault's debt, and in exchange, the vault's sBTC collateral is transferred to the pool.
As a Stability Provider, you deposit BSD into the Stability Pool. When vaults are liquidated (typically just below a 110% collateral ratio), your BSD is used to repay their debt, and you receive a pro-rata share of their sBTC collateral—usually worth more than the BSD burned.
Over time, your BSD balance in the pool decreases, but your sBTC rewards grow. The more BSD you deposit and the longer you remain in the pool, the greater your share of liquidated collateral.
Yes, 1000 BSD is the minimum deposit and balance required for each stability provider.
You can withdraw your deposited BSD or earned sBTC rewards from the Stability Pool at any time. There is no minimum lockup duration.
While liquidations typically occur when a vault's collateral ratio is between 100% and 110%, it is theoretically possible for a vault to be liquidated below a 100% ratio during extreme events like a flash crash, oracle failure, or another unforeseen condition. In such a case, you may experience a net loss in dollar terms.
If the Stability Pool is empty, the system uses a secondary liquidation mechanism called Redistribution. In this situation, the system redistributes the debt and collateral from liquidated vaults to all other existing vaults in the protocol.