Redemption & USFI Price Stability
How does USFI closely follow the price of USD ?
USFI maintains its peg to the USD through a decentralized, algorithmic mechanism that ensures stability. This system utilizes a combination of collateralized debt positions, dynamic fees, and redemptions. The protocol’s internal mechanisms, including liquidation and redemption fees, adjust based on market conditions, which help to stabilize the price of USFI. Additionally, oracles providing real-time price data ensure the protocol maintains the 1:1 peg with USD.
What are redemptions ?
Redemptions refer to the process where USFI is exchanged for collateral (such as ETH, BTC, or STRK) from a Trove. When a user redeems USFI, they are essentially paying back their debt by returning USFI to the system in exchange for the underlying collateral. The redemption mechanism helps to maintain the stablecoin's peg by balancing the supply of USFI in circulation.
In simple terms, redemptions allow users to get back their collateral when they return their minted USFI to the system.
Redemptions start from the borrower paying the least interest.
Is a redemption the same as paying back my debt ?
Not entirely. While both actions involve repaying USFI, a redemption is specifically related to returning USFI to the system and receiving collateral in exchange.
In contrast, paying back your debt involves clearing the amount you owe without necessarily involving redemptions, as you might choose to use USFI for other purposes.
However, both actions settle your debt, and in both cases, once the debt is cleared, you can release your collateral.
What happens if two Troves have the same IR ?
In this case, the "Last In, First Out" (LIFO) principle applies, meaning the Trove that set its interest rate more recently will be redeemed first.
When can redemptions occur ?
A redemption can occur at any time, but will likely only happen when it is profitable to do so. This is usually the case when the price of USFI is less than $1 (minus the current redemption fee).
Who can initiate a redemption ?
Any Ethereum address can initiate a redemption, provided that they have a sufficient amount of USFI to do so. However, we expect redemptions to be mainly performed by professional bots rather than humans.
What happens if my Trove gets redeemed ?
You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral in return.
If your collateral is redeemed, an equivalent amount of your debt in USD terms is repaid. The redeemer receives your collateral, less the redemption fee, which remains in your Trove. This means that at the time of redemption you have not lost any money in USD terms, likely even made a small gain with the received redemption fee as the peg recovers.
Example with ETH at $3'000:
Before the redemption: 10 ETH collateral, 20'000 USFI debt.
After the redemption: 5.025 ETH collateral, 5'000 USFI debt.
You can see your collateral and debt reduced equally (in USD terms) and the redemption fee (0.025 ETH) being added to your collateral value.
Is there a redemption fee ?
Redemption fees are based on the baseRate state variable, which is dynamically updated. The baseRate increases with each redemption, and exponentially decays according to time passed since the last redemption (half-life of 6 hours).
Upon each redemption of x USFI: baseRate is decayed based on time passed since the last fee event and incremented by an amount proportional to the fraction of the total USFI supply to be redeemed, i.e. x/total_usfi_supply
The redemption fee percentage is given by min (0.5% + baseRate, 100%).
How is the redemption fee calculated ?
The redemption fee is a dynamic fee applied when users redeem USFI for collateral. It is determined by several factors :
Supply and demand for USFI – When more USFI is redeemed than minted, the fee increases to prevent excessive redemptions and keep the system balanced.
Collateral value and market conditions – If the collateral backing USFI (e.g., ETH, BTC) sees volatility, the fee may adjust to ensure stability.
Redemption volume – The protocol algorithm ensures that redemption fees increase during high redemption periods to manage supply.
The redemption fee is designed to maintain the peg and to ensure that USFI's value remains consistent with USD.
How is the baseRate calculated ?
The baseRate determines the redemption fee and is based on a formula that accounts for the overall supply-demand dynamics within the system. It adjusts based on :
The total supply of USFI in circulation compared to the total amount of collateral locked in Troves.
Market conditions, including liquidity and volatility in the collateral assets.
Redemption activity—if there is a higher volume of redemptions, the baseRate increases to help restore balance in the system.
By adjusting this rate, the protocol ensures USFI stays close to its 1:1 peg with USD.
As a borrower, do I lose money if I'm redeemed against ?
Yes, borrowers may experience a loss if their Trove is redeemed against.
Here’s why:
Redemptions typically occur when the system needs to balance out excessive USFI. If your Trove is redeemed at a higher fee, you may get less collateral in return than expected.
The redemption fee may cause you to lose part of your collateral during the process.
In short, borrowers can face some loss if their position is liquidated or redeemed against, which makes it crucial to maintain a healthy collateral ratio and watch for high redemption periods.
Ho can I Avoid Being Redeemed Against?
Here are some key strategies:
Adjust Your Interest Rate – Increasing your interest rate can make your Trove less attractive for redemptions, as the protocol prioritizes redeeming against Troves with the lowest rates.
Monitor and Maintain a Healthy Collateral Ratio – While the max LTV ratio, keeping your ratio significantly higher reduces the likelihood of being targeted for redemptions.
By actively managing your interest rate and collateral levels, you can reduce the chances of being redeemed against while optimizing your borrowing strategy.
Last updated