Redemption
The mechanism that maintains USDFC's 1:1 peg to the US Dollar
Overview
The Redemption Mechanism is a critical component of the USDFC Stablecoin Protocol that allows USDFC holders to exchange their tokens for Filecoin (FIL) at face value. This direct conversion path creates arbitrage opportunities that help maintain USDFC's peg to the US Dollar, especially when the market price falls below $1.
Benefits of Redemption
Arbitrage Opportunity: If USDFC dips below $1, buying and redeeming it for FIL can lock in potential gains and help restore the peg
Direct FIL Access: Redemption guarantees a way to swap USDFC for FIL, even when external exchange liquidity is low
Reduced Market Impact: Converting large FIL positions into USDFC through redemption avoids triggering selling pressure on open markets
How It Works
The redemption process allows any USDFC holder to exchange their tokens for FIL at the current USD value, targeting Troves with the lowest collateral ratios first:
A user submits a redemption request to the protocol
The protocol uses the FIL collateral from the most under-collateralized Troves to fulfill the request
The user receives FIL, while the targeted Troves have their debt reduced but also lose collateral
Important Distinction
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.
The system requires a minimum borrowed amount of 180 USDFC and reserves an additional 20 USDFC as long as trove exists. You cannot redeem to reduce a trove's borrowed amount below 180 USDFC; if it would, the redemption amount will be automatically adjusted. However, you may redeem enough to fully close a trove (reducing the borrowed amount to 0). Redemption can span multiple troves, but the same minimum-borrow rule applies to each.
Key Parameters
Redemption Fee
Fee charged on redemption transactions
Base Rate + 0.5%
Minimum Fee
Minimum fee regardless of Base Rate
0.5%
Base Rate
Variable component that increases with redemption activity
0% to 4.5%
Minimum Trove Size
Minimum USDFC debt a Trove must maintain
180 USDFC
Redemption Fee
Base Rate increases with frequent redemptions and decays over time when redemptions are low
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
Peg Mechanism
The redemption mechanism works alongside minting to maintain USDFC's 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
The redemption fee (Base Rate + 0.5%) still applies, meaning users should factor in the cost 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
Minting requires over-collateralization (at least 110% FIL) and incurs a one-time minting fee (Base Rate + 0.5%)
Example of a Redemption
Market Situation: USDFC trades at 0.98 USD
Redemption Initiation: Buy 1,000 USDFC with 980 USD and user redeems 1,000 USDFC
Redemption Fee: Assume the Base Rate is 1.0%
Redemption Fee = (1.0% + 0.5%) of 1,000 USDFC = 15 USDFC
Net Redemption: The user receives FIL equivalent to 985 USD after the fee is deducted. Net profit of 5 USD
Common Questions
Can I redeem USDFC to pay back my own debt? No, redemption is not a debt repayment mechanism. It's a separate process that allows USDFC holders to exchange their tokens for FIL at face value.
How can I avoid having my Trove targeted by redemptions? Maintain a higher collateral ratio than other Troves in the system. Redemptions always target Troves with the lowest collateral ratios first.
Is there a limit to how much USDFC can be redeemed at once? There's no hard cap, but large redemptions may be limited by the available collateral in under-collateralized Troves and will incur higher fees as the Base Rate increases.
Related Topics
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