Redemptions
Last updated
Last updated
Redemptions are the protocol's mechanism for exchanging eBTC for stETH at face value, based on the spot BTC/stETH Oracle price. This means that redemptions allow for swapping at price parity, irrespective of the market price of eBTC.
To initiate a redemption, a user must transfer the desired amount of eBTC into the system. The system then calculates the equivalent amount of stETH based on the latest price returned by the Oracle. The estimated stETH amount is withdrawn from the CDP with the lowest ICR (highest risk) in the system and transferred to the user, after deducting a fee. The eBTC payment is subsequently deducted from the debt of the CDP being redeemed against and burned, and the fee is deposited into the protocol's Treasury.
Users can redeem eBTC for stETH at any time without any limit, but an exponentially scaling fee algorithm is in place to prevent misuse of the mechanism. The redemption fee starts at 1% and varies according to the algorithm described in the section below.
Redemptions are disabled whenever the Total Collateral Ratio (TCR) goes below the Minimum Collateral Ratio (MCR) of 110%.
Redemptions will always result in a net 0 impact to the CDP redeemed against. If your CDP is redeemed against with a value equal or higher to your CDP's debt, your debt will be fully repaid, your CDP closed and any excess collateral resulting of the redemption will become available for you to claim. Therefore, the value of the eBTC that you borrowed plus your claimable collateral surplus will be equal in value to the collateral your CDP held initially, hence you will see a net 0 impact.
Redemptions are only allowed if they result in the closure of the CDPs being redeemed or if they leave this CDP with at least the minimum amount of collateral required (2 stETH) remaining.
Yes, if the desired redemption amount surpasses the debt of the riskiest CDP, the system permits redemption across multiple CDPs until the redemption amount is fulfilled. CDPs will be redeemable based on their ICRs, starting from the lowest in the system and moving upwards.
Redemptions are a crucial tool for establishing a firm price floor for eBTC and bolstering its peg. As they utilize the oracle price to estimate the redemption amount, an arbitrage opportunity arises whenever eBTC trades below the price parity. Arbitrageurs can then buy eBTC at a discount and redeem it for a higher value until the peg is restored.
As mentioned, there is a minimum fee of 1% for redemptions, which determines the actual hard price floor of eBTC. In other words, for there to be an incentive to redeem and arbitrage the price back to its peg, eBTC would have to trade below 99% of the price of BTC (price parity - fee), assuming the fee is at its lowest.
In order for redemptions to effectively introduce peg stability, their daily volume should be limited to a small percentage of the total available liquidity of eBTC. For this reason, the protocol limits the utilization of the mechanism by increasing its fee in proportion to the daily usage volume. At any given time, the fee can be estimated according to the following logic:
Upon every redemption, the Base Rate b(t) at time t can be estimated as follows:
Where α or alpha is constant value (modifiable by governance) that determines the slope of the fee's increment, m is the amount of eBTC redeemed and n is its total supply.
The base rate decays over time towards 0 according to the following logic, which is applied upon every redemption before the estimation of the new base rate:
Where δ or decay factor is a constant (modifiable by governance) chosen so that the half-life of the fee is 12hrs and Δt is the time elapsed since the last redemption.
In order to avoid getting redeemed against, it is recommended to keep a high ICR relative to the rest of the CDPs.
Remember that the riskiest CDPs, those with the lowest ICR, are the first in line to be redeemed against.
At launch and during the initial "bootstrapping" phase, please note that redemptions will be temporarily disabled. The activation of this feature will be contingent upon the maturity of eBTC asset liquidity and the presence of an adequate number of active CDPs. This careful approach ensures that the redemption mechanism functions optimally from the outset.
It is anticipated that redemptions will be enabled approximately 1 to 2 months after the initial launch date. Rest assured, advance notice will be provided once the exact date is confirmed.
Furthermore, it's important to highlight that redemptions can also be deactivated via the Minimized Governance feature as a precautionary measure if the need arises.
