Peg Stability & Redemptions
Last updated
Last updated
Redemptions play a crucial role in maintaining the ebUSD peg. ebUSD is always redeemable for $1 worth of LRT collateral.
For example, if MCR is 110% for a given LRT collateral.
If ebUSD is above $1.10, arbitrageurs can borrowing the maximum amount against their collateral and selling the ebUSD on the market for more than USD 1.10.
If ebUSD is below $1, because if the value of ebUSD falls below that of USD, arbitrageurs will buy ebUSD on the open market and redeem it for LRTs at a profit.
When a redemption is initiated, the LRT claimable by the redeemer comes from the Trove paying the lowest interest rate. Users who’s loans are redeemed against do not incur a net loss because their outstanding debt is reduced according to the USD value of the redeemed LRT collateral, but they lose exposure to their LRTs.
In Liquity v1 and Prisma, collateral provided to the redeemer was taken from the loan(s) with the lowest collateral ratio. In Ebisu, the decoupling of redemptions from collateralization ratio (LTV) of loans enables long term capital efficiency for the protocol.
Note, redemptions are a separate mechanism from paying back your debt; they are often confused.
