Redemptions & Price Stability

How does PUSD closely follow the price of USD?

The ability to redeem PUSD for BTC at face value (i.e. 1 PUSD for $1 value worth of BTC) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are called "hard peg mechanisms" since they are based on direct processes.

PUSD also benefits from less direct mechanisms for USD parity, which are called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point (cooperation without communication). Since Palladium treats PUSD as being equal to the USD value of an asset, parity between the two is an ‘implied’ equilibrium state of the protocol.

Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying PUSD is below $1 value worth of BTC), so too does the baseRate — making borrowing less attractive, which keeps new PUSD from hitting the market and driving the price below $1 value worth of BTC.

What is the PUSD token redemption?

Any PUSD holder (whether or not they have an active Trove) may redeem their BTC directly with the system. Their PUSD is exchanged for BTC, at face value: redeeming x PUSD tokens returns $x worth of BTC value (minus a redemption fee).

When PUSD is redeemed for BTC, the system cancels the PUSD debt from Troves, and the BTC is drawn from their collateral.

In order to fulfill the redemption request, Troves are redeemed from, in ascending order of their collateralization ratio.

A redemption sequence of n steps will fully redeem from up to n-1 Troves, and, and partially redeem from up to 1 Troves, which is always the last Troves in the redemption sequence.

Redemptions are blocked when TCR < 110% (there is no need to restrict ICR < TCR). At that TCR, redemptions would likely be unprofitable, as PUSD is probably trading above $1 of BTC value if the system has crashed that badly, but it could be a way for an attacker with a lot of PUSD to lower the TCR even further.

Note that redemptions are disabled during the first 14 days of operation immediately following deployment of the protocol to protect the monetary system in its infancy.

  • Partial redemption

Most redemption transactions will include a partial redemption since the amount redeemed is unlikely to perfectly match the total debt of a series of Troves.

The partially redeemed Troves are re-inserted into the sorted list of Troves and remain active, but with reduced collateral and debt.

  • Full redemption

A Trove is defined as “fully redeemed from” when the redemption has caused its debt to be fully absorbed. Then, its Liquidation Reserve is canceled (and returned to the borrower) and the debt is zeroed.

Before closing, we must handle the Troves collateral surplus; that is, the excess BTC collateral remaining after redemption, due to its initial over-collateralization.

This collateral surplus is sent to a collateral surplus pool, and the borrower can reclaim it later. The Trove is then fully closed.

How do redemptions create a price floor?

Economically, the redemption mechanism creates a hard price floor for PUSD, ensuring that the market price stays at or near to $1 value of BTC.

Is redemption the same as paying back my debt?

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Trove's debt and collateral.

How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula (baseRate + 0.5%) * BTC drawn.

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable in Palladium, which is dynamically updated. The baseRate increases with each redemption, and decays according to time passed since the last fee event – i.e. the last redemption or issuance of PUSD.

Upon each redemption: baseRate is decayed based on time passed since the last fee event – baseRate is incremented by an amount proportional to the fraction of the total PUSD supply that was redeemed – the redemption fee is given by (baseRate + 0.5%) * BTC drawn

As a borrower, do I lose money if I'm redeemed against?

If your Trove is redeemed against, you do not incur a net loss. However, you will lose some of your BTC exposure. Your Troves collateral ratio will also improve after a redemption.

How can I avoid being redeemed against?

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Troves in the system.

Consider using a Debt In Front (DIF) indicator to gauge the cumulative total value of PUSD debt of all Troves that have a lower collateral ratio than your Trove's individual collateral ratio position.

This value can be useful for determining a Trove's redemption risk since the riskiest Troves (Trove with the lowest collateralization ratio in the protocol at the time of redemption) are first in line when a redemption takes place.

Can the PUSD stablecoin become unstable?

Yes. The outside market may trade the stablecoin for less than the one USD equivalent. However, the redemption function decreases the likelihood, because anyone can redeem 1 PUSD for $1 of BTC value at any time.

How does the protocol know how much PUSD to mint from deposited BTC?

It looks at the price of BTC/USD and mints the required amount of PUSD being requested, assuming the chosen parameters meet the minimum loan requirements defined within the protocol.

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