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Rigid Redemption and eUSD Price Stability
How is eUSD hard-pegged to the price of USD?
eUSD maintains a hard peg to the price of USD through a combination of direct and indirect mechanisms. Directly, the ability to redeem eUSD for ETH at face value (1 eUSD for $1 of ETH) and the minimum collateral ratio of 150% create a price floor and ceiling, respectively, through arbitrage opportunities. These are called "hard peg mechanisms".
eUSD also benefits from indirect mechanisms for USD parity, referred to as "soft peg mechanisms". One such mechanism is parity as a Schelling point. Since Lybra treats eUSD as equal to USD, parity between the two is an implied equilibrium state of the protocol.
Users can take advantage of arbitrage opportunities by exchanging $1 worth of ETH for $1 eUSD when eUSD falls below $1 (eUSD is equal to $1 USD at face value).
What is Rigid Redemption?
Rigid redemption is the process of exchanging eUSD for ETH at face value, as if 1 eUSD is exactly worth $1. In other words, for
xeUSD, you get
xdollars worth of ETH in return.
Users can redeem their eUSD for ETH at any time without limitations. However, a 0.5% rigid redemption fee (subject to revision by the Lybra Community DAO) is charged on the redeemed amount, and this fee is fully paid to the redemption provider.
If the current redemption fee is 0.5%, the price of ETH is $1,500, and you redeem 1,200 eUSD, you would receive 0.796 ETH (0.8 ETH minus a redemption fee of 0.004 ETH).
Please note that the redeemed amount is considered when calculating the base rate and may impact the redemption fee, especially for large amounts.
Is rigid redemption the same as paying back my debt?
No, rigid redemption and paying back debt are two entirely separate mechanisms. Rigid redemption involves exchanging eUSD for ETH at face value, while paying back debt is the adjustment of collateral and debt.
How is the rigid redemption fee calculated?
Under normal operation, the Rigid Redemption Fee = 0.5% * Redeemed ETH.
If the rigid redemption is conducted through passively generated stETH, the redemption fee is 0.
How does the rigid redemption mechanism work?
- The passively increased stETH in the Lybra Protocol can be used for rigid redemption at any time. (i.e., passively increased stETH = stETH balance - Total deposited ETH)
- Lybra Protocol offers a rigid redemption service feature. If a user chooses to provide rigid redemption services, they will be incentivized through token airdrops, service fee compensations, and other means.
As a (minter) borrower, you can choose whether to provide rigid redemption services. You will only participate in rigid redemptions if you opt to become a redemption provider.
During the redemption process, you will lose a portion of your collateral, but your debt will be reduced accordingly.
The USD value reduction of your ETH collateral corresponds to the nominal eUSD amount decrease in your debt. You can think of redemptions as if someone else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected collateral and debt, making them less risky. Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off the debt are called full redemptions.
A user deposits 3 ETH ($4,500) as collateral and mints (borrows) 3,000 eUSD. This puts their collateral rate at 100% * 4500 / 3000 = 150%. Let's imagine this is the lowest collateral rate and look at two examples of partial and full redemptions:
- Example of a partial redemptionSomeone redeems your ETH using 1,500 eUSD, and the redemption fee is 0.5%. The redemption provider gets 0.995 ETH in return (=1500 * 99.5% / 1500), and your collateral is reduced from 3 ETH to 2.005 ETH. Your debt is now 1,500 eUSD, raising your collateral rate from 150% to 100% * 2.005 * 1500 / 1500 = 200.5%.
- Example of a full redemptionSomeone redeems your 3 ETH using 4,500 eUSD. Given that the redemption amount exceeds your debt, your debt of 3,000 eUSD will be fully liquidated, and the collateral will be reduced by 3,000 * 0.995 worth of ETH, leaving you with 1.01 ETH of collateral (= 3 - 3,000 * 0.995 / 1,500).
What are the advantages of being a Redemption Provider?
- You can charge a 0.5% fee whenever someone redeems their eUSD against your ETH collateral.
- You won't experience a total loss even if your collateral is redeemed. Only a part of your ETH position will be lost, and your eUSD debt will be reduced accordingly. Additionally, your collateral rate will increase to a much healthier level following the redemption.
- The yield of the LBR reward as a redemption provider is increased by 20%.
How can I avoid being rigidly redeemed against?
You'll only be subjected to rigid redemption once you choose to provide redemption services.