To simplify it, Redemptions help pay off the debt of Meridians' riskiest users in exchange for their collateral.
USDM redemptions are a special feature of Meridian. This mechanism allows USDM holders to exchange their USDM for the actual Native (ETH or TLOS) collateral at any time. The rule is simple: 1 USDM is always treated as equal to $1 worth of native collateral (after deducting the current redemption fee).
The redemption process is different from repaying your Trove's debt. Repaying debt is free, but redeeming USDM incurs a fee.
For instance, if the fee is 1%, and you're redeeming 100 USDM when the price of ETH is $1,000, you'd get 0.099 ETH (subtracting a fee of 0.001 ETH) instead of 0.1 ETH.
Let's break down how redemptions work:
-Someone decides to redeem their USDM.
-All Troves (positions in Meridian) are sorted from the riskiest to the least risky based on their collateral ratio.
-The redeemed USDM is used to pay off the debt of the riskiest Trove(s) in exchange for their collateral.
-The Trove owner still keeps their remaining collateral.
Borrowers who are redeemed against do not experience a net loss. (Unrealized loss is only incurred if the price of the native collateral asset increases in value past the initial value you entered in) For more information see: Can I lose my funds?
Is a Redemption the Same as Paying Back My Debt?
No, redemptions work differently from paying back debt. To settle your Trove's debt, you adjust its debt and collateral.
How is the Redemption Fee Calculated?
Under normal conditions, the redemption fee is calculated using the formula (baseRate + 0.5%) * ETH drawn.
How is the BaseRate Calculated?
Redemption fees depend on the dynamic baseRate in Meridian.
This baseRate increases with each redemption and gradually decreases to 0 over time with a 12-hour half-life.
Upon each redemption:
baseRate decays based on time since the last fee event.
baseRate increases based on the fraction of the total USDM supply that was redeemed.
The redemption fee formula is (baseRate + 0.5%) * ETH drawn, with baseRateNew calculated using the formula:
baseRateNew = baseRateOld + redeemedUSDM / (2 * totalUSDM)
where baseRateOld is the value just before this redemption, and baseRateNew is the new value applied to this redemption.
As a Borrower, Do I Lose Money if I'm Redeemed Against?
If your Trove is redeemed against, you don't experience a net loss. However, you lose some ETH exposure, and your Trove's collateral ratio improves after redemption.
How Can I Avoid Being Redeemed Against?
The best way to avoid redemption is by maintaining a high collateral ratio compared to other Troves in the system. Remember: The riskiest Troves (those with the lowest collateral) are redeemed first.