Redemptions & RWA Token Price Stability
Last updated
Last updated
The ability to redeem real world asset tokens for collateral at face value (i.e. $1 of real world asset tokens for $1 of collateral at the target peg price) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities.
We call these "hard peg mechanisms" since they are based on direct processes.
Lendr's real world asset tokens also benefit from less direct mechanisms for target peg parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since the lending platform treats the Lendr real world asset tokens as being equal to their target pegs, 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 the real world asset tokens is below the target peg), so too does the baseRate — making borrowing less attractive which keeps new real world asset tokens from hitting the market and driving the price below the target peg.
These mechanisms combined create monetary incentives for users to maintain the target peg at all times. This system has been tested for years by DeFi stablecoin protocols.
Yes, this is the same peg mechanism used by Liquity to maintain their stablecoin peg for years. Here is a comparison to other top stablecoins (DAI, USDC, USDT, etc.) on speed to repeg:
A redemption is the process of exchanging Lendr real world asset tokens for collateral tokens at the peg value.
Any users can redeem their real world asset tokens for collateral at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
Using an example with USDL on BSC, if the current redemption fee is 1%, the price of BNB is $500 and you redeem 100 USDL at a price peg of $1, you would get 0.198 BNB (0.2 BNB minus a redemption fee of 0.002 BNB).
Note that the redeemed amount is taken into account for calculating the baserate and might have an impact on the redemption fee, especially if the amount is large.
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.
Under normal operation, the redemption fee is given by the formula (baseRate + 0.875%) * CollateralTokenDrawn
Redemption fees are based on the baseRate state variable in the real world asset tokens, which is dynamically updated. The baseRate increases with each redemption, and decays according to the time passed since the last fee event - i.e. the last redemption or issuance of a real world asset tokens.
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 real world asset tokens supply that was redeemed
The redemption fee is given by (baseRate + 0.875%) * CollateralTokenDrawn
If your Trove is redeemed against, you do not incur a net loss. However, you will lose some of your collateral exposure. Your Trove's collateral ratio will also improve after a redemption.
The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Trove's in the system. Remember: The riskiest Troves (i.e. lowest collateralized Troves) are first in line when a redemption takes place.
