Redeem Stablecoins
Redemptions allow you to exchange stablecoins directly for collateral at the oracle price. This provides guaranteed exit liquidity and helps maintain the stablecoin’s peg.
Overview
Redemptions let you:
- Exit your stablecoin position for collateral at a known price
- Arbitrage when the stablecoin trades below $1 on secondary markets
- Access liquidity without relying on DEX depth
Only the portion of collateral backed by free debt positions is available for redemption. Paid debt positions are protected from redemptions.
Prerequisites
Before redeeming, ensure:
- You hold the stablecoin (Coin) you want to redeem
- Sufficient free debt exists in the system to back your redemption
- The oracle price feed is not stale (liquidations must be enabled)
How Redemptions Work
- You submit Coin to redeem
- Protocol calculates collateral value at oracle price minus the redemption fee
- Protocol burns your Coin and reduces total free debt
- Protocol transfers collateral to you
- Free debt borrowers have their debt and collateral reduced proportionally
Redemption Fee
A small fee (set per instance, max 3%) protects free debt borrowers from adverse selection:
Collateral Out = (Coin In × (10000 - redeemFeeBps)) / Oracle Price / 10000
Step-by-Step Guide
Step 1: Check Redemption Capacity
Before redeeming, verify:
- Total free debt: Maximum amount that can be redeemed
- Redeemable collateral: Collateral backing free debt positions
- Current redemption fee: Percentage deducted from output
// Check redeemable capacity
uint totalFreeDebt = lender.totalFreeDebt();
uint redeemFeeBps = lender.redeemFeeBps();
Step 2: Calculate Expected Output
Preview how much collateral you’ll receive:
// Get expected collateral output
uint amountOut = lender.getRedeemAmountOut(coinAmount);
Step 3: Execute Redemption
- Enter the amount of Coin to redeem
- Set minimum collateral output (slippage protection)
- Approve Coin spending (first time only)
- Confirm the redemption transaction
// Redeem Coin for collateral
uint collateralReceived = lender.redeem(coinAmount, minCollateralOut);
Arbitrage Opportunity
Redemptions create an arbitrage opportunity when the stablecoin trades below $1:
- Buy Coin at $0.98 on DEX
- Redeem Coin for $1 worth of collateral (minus ~0.3% fee)
- Profit: ~$0.017 per Coin (1.7% return)
This arbitrage helps restore the peg by:
- Increasing buy pressure on secondary markets
- Reducing Coin supply through redemption burns
- Reducing free debt in the system
Impact on Free Debt Borrowers
When you redeem, free debt borrowers experience:
Debt Reduction
- Total free debt decreases by your redemption amount
- Each borrower’s debt drops proportionally to their share
Collateral Seizure
- Collateral is taken pro-rata from all free debt positions
- Borrowers keep the redemption fee portion
Example
Before:
- Alice: 600 debt, 1000 collateral (free)
- Bob: 400 debt, 800 collateral (free)
- Total: 1000 debt
Redemption: 100 Coin at 0.3% fee
After:
- Alice: 540 debt (-60), ~940 collateral (free)
- Bob: 360 debt (-40), ~760 collateral (free)
- Total: 900 debt
Redemption Limitations
Redemptions may be limited or unavailable when:
Insufficient Free Debt
- Cannot redeem more than
totalFreeDebt
- System needs borrowers in free debt mode
Oracle Staleness
- Redemptions disabled if oracle price is stale
- Protects against price manipulation
Insufficient Redeemable Collateral
- Must have enough collateral from free debt positions
- Paid debt collateral is never touched
Quick Reference
| Function | Description |
|---|
redeem(amountIn, minAmountOut) | Redeem Coin for collateral |
getRedeemAmountOut(amountIn) | Preview collateral output |
totalFreeDebt() | Max redeemable amount |
redeemFeeBps() | Current redemption fee |
Comparison: Redemption vs PSM Sell
| Feature | Redemption | PSM Sell |
|---|
| Output | Collateral asset | PSM asset (e.g., USDC) |
| Price | Oracle price - fee | 1:1 ratio |
| Availability | Requires free debt | Requires PSM liquidity |
| Fee | 0-3% | None |
| Use case | Arbitrage, collateral exposure | Stablecoin exit |
Risks
Slippage
- Set appropriate
minAmountOut to protect against price changes
- Oracle price may update between transaction submission and execution
Gas Costs
- Consider gas costs when calculating arbitrage profitability
- Batch redemptions if economical
Front-running
- Public mempool transactions may be front-run
- Use private transaction services for large redemptions
