📫Redemption

Redemptions in the Secured Finance protocol allow USDFC holders to exchange their USDFC for Filecoin (FIL) at an equivalent USD value, ensuring that USDFC maintains its peg to the USD. This function is available anytime while profitable when USDFC trades below 1.0 USD in exchanges.

Redemption Process

• Who Can Redeem: Anyone holding USDFC can initiate a redemption, swapping USDFC for FIL at the peg value (1 USDFC = 1 USD worth of FIL).

• Purpose: This is not a debt repayment mechanism for borrowers. Instead, it is an exchange or swap function, allowing users to convert their USDFC holdings into FIL.

• Steps:

  1. A user submits a redemption request to the protocol.

  2. The protocol uses the FIL collateral from the most under-collateralized Troves to fulfill the request.

  3. The user receives FIL, while the Trove with the highest risk has its debt reduced but also loses collateral.

Redemptions target Troves with the lowest collateral ratios first. Trove owners are advised to keep their collateral ratios well above the 110% minimum (ideally 150% or higher) to reduce the likelihood of being affected by redemptions. Troves affected by redemptions undergo a forced swap of USDFC for their collateral at the current spot rate, impacting their collateral balance.

Key Consideration

Not Debt Repayment: Redemption does not mean repaying borrowed USDFC. Instead, it allows the holder to exchange USDFC for FIL directly. Borrowers must repay their debt separately if they wish to close or manage their positions.

Redemption Fee

The Redemption Fee is calculated as Base Rate + 0.5%, which ensures a minimum fee of 0.5%. This fee dynamically adjusts depending on redemption activity:

• Fee Calculation:

$$\text{Redemption Fee} = (\text{Base Rate} + 0.5\%) \times \text{Redeemed USDFC}$$

• Base Rate increases with frequent redemptions and decays over time when redemptions are low. It can never fall below 0.5%, ensuring that the minimum fee is always charged.

• The more redemptions occur, the higher the Base Rate will rise, while a lack of redemptions leads the rate to decay back to the 0.5% minimum.

Note that the redeemed amount is taken into account for calculating the base rate and might have an impact on the redemption fee, especially if the amount is large.

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Peg Mechanism

The peg mechanism in the Secured Finance protocol ensures that USDFC maintains its stability around 1.0 USD.

Below Peg (USDFC < 1.0 USD):

• When USDFC trades below 1.0 USD, users can redeem USDFC for FIL at a 1:1 rate, profiting from arbitrage. This reduces the circulating supply of USDFC, pushing its price back toward the peg.

• Note: Even in this scenario, the redemption fee (Base Rate + 0.5%) still applies, meaning users should factor in the cost of redemptions when calculating arbitrage opportunities.

Above Peg (USDFC > 1.0 USD):

• In this scenario, minting USDFC by depositing FIL becomes attractive because users can borrow USDFC at the 1:1 rate and sell it at a premium. This increases the circulating supply and pushes the price back toward 1.0 USD.

• Note: Minting requires over-collateralization (at least 110% FIL) and incurs a one-time minting fee (Base Rate + 0.5%), meaning users should account for these costs when minting USDFC above the peg.

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Example of a Redemption

1. Market Situation: USDFC trades at 0.98 USD.

2. Redemption Initiation: Buy 1,000 USDFC with 980 USD and user redeems 1,000 USDFC.

3. Redemption Fee: Assume the Base Rate is 1.0%.

   • Redemption Fee = (1.0% + 0.5%) of 1,000 USDFC = 15 USDFC.

4. Net Redemption: The user receives FIL equivalent to 985 USD after the fee is deducted. Net profit of 5 USD.