What are Redemptions?

CUSD redemptions are one of the Bank of Cronos Loans protocol's most unique features. Simply put: The redemption mechanism gives CUSD holders the ability to redeem CUSD at face value for the underlying Loan protocol collateral (WCRO etc.) at any time. Redemptions are always honored such that 1 CUSD equals $1 worth of collateral (minus the current redemption fee).

The redemption mechanism is separate from paying back your Loan debt. Paying back one’s debt is free of charge, while redemptions will incur a fee.

How redemptions work is simpler than one might think, let’s walk through it:

• Someone comes along to redeem their CUSD

• All Loans (i.e. positions in protocol smart contracts) are sorted from lowest collateral ratio to the highest collateral ratio (most risky to least risky)

• The redeemed CUSD is used to pay off the debt of the riskiest Loan(s) in return for their collateral

• The Loan owner’s remaining collateral is left for them to claim (borrowers who are redeemed against do not incur a net loss)

Yes, you read that correctly. Redemptions pay off the debt of BOC Loan's riskiest users in return for their collateral.

Note: By default, redemptions incur a fee of at least 0.5%, making them unattractive outside of below peg arbitrage opportunities.

Why allow CUSD redemptions?

While the ability to pay off someone else’s debt in return for their collateral seems strange at first, redemptions play a key role in Bank of Cronos Loans.

One important feature of redemptions is that they help protect CUSD’s price floor of $1 through direct arbitrage. WhenCUSD is floating below peg, an arbitrageur can simply redeem their CUSD against the system as if it was worth $1. As a result, this shrinks the outstanding supply of CUSD, which will likely have a positive affect on CUSD’s price. On the other hand, when CUSD is at or above peg, redemptions end up being a bad deal for the redeemer.

A second important feature of redemptions is that they directly affect the borrowing fee charged on newly issued debt. When redemptions occur, the system’s baseRate increases, in turn causing Liquity’s one time borrowing fee to increase — discouraging people from borrowing and dampening the amount new CUSD entering the market. When redemptions aren’t occurring, the baseRate gradually decays over time, making it cheaper to borrow and encouraging new CUSD to enter the market.

How can I be affected by CUSD redemptions?

As a loan owner, losing your collateral to a redemption isn’t desirable, but it’s not the end of the world either. If your Loan is redeemed against, you will not incur a net loss — you’ll only lose some of your collateral (WCRO etc.) exposure while receiving a lesser debt burden.

However, it is possible that your Loan can be “fully redeemed” against. This means that a redemption fully paid off your Loan's debt in return for a corresponding amount of collateral. If this happens, your Loan will be closed and your surplus collateral will be sent to the CollSurplusPool where you can claim it from your frontend of choice. Even in the event of a full redemption, you don’t incur a net loss. That said, it is possible to keep your Loan out of the “line of fire” and avoid being redeemed against altogether.

It’s important to remember that the riskiest Loans are redeemed against first — i.e. the Loans with the lowest collateral ratios. To avoid being affected by redemptions, one can simply monitor their position among Loans and adjust accordingly. This strategy becomes even more viable if you notice CUSD starting to float below $1. As long as CUSD is trading above $1, people have no incentive to redeem.

To help in this process, most Liquity Frontend Operators provide a Risky Loans tab that will allow you to easily monitor your place in line. The less risky your Loan, the less likely you are to be affected by redemptions — so it’s quite easy to steer clear of them. Staying at or above a 150% collateral ratio is generally recommended, however, a Loan can still be redeemed against at any collateral ratio as long as it’s among the most risky. More on that here.