# Redemption

### What's redemption?

A redemption involves exchanging `wenUSD` for collaterals(in LSDs) at its stated value of `$1` per `wenUSD`, which means that if you have `x wenUSD`, you will receive collaterals worth `$x` in return. 

Users are free to redeem their `wenUSD` for collaterals without any restrictions. However, there may be a redemption fee applied to the redeemed amount. For instance, if the current redemption fee is `0.5%` and the price of LSD is `$2,000`, redeeming `10,000` `wenUSD` as LSD would result in:

$$
Redemption\ Fees=\frac{10,000}{2,000}\*0.5%=0.025\ LSD
$$

as redemption fees.

It's important to note that the redeemed amount is factored into the calculation of the base rate and can impact the redemption fee, particularly for larger amounts.

### What's the difference between a redemption and repayment of a loan? 

Redemption and repayment are two absolutely **separated** mechanisms.

* Only trove owners can repay their loan for increase collateral ratio or close their troves, while redemptions can be done by anyone who has `wenUSD` in their wallet.
* Repayment of loan causes **no fees** while redemption would result a slight charge.
* Repayment only happens in the repayor's trove while redemption happens according to troves' CR ranking(health ranking), from lowest to highest algorithmically.

### How is the redemption fee defined?

In normal circumstances, the redemption fee can be calculated using the formula:

$$
Redemption\ Fees\ =(BaseRate+0.5%)\*AmountRedeemed
$$

The redemption fees are determined based on the `BaseRate`, which is a dynamic variable in WEN protocol that gets updated regularly, **increasing** with each redemption and gradually **decreasing** over time since the last redemption or minting of `wenUSD`.

Details about `BaseRate's` calculation can be find in [Liquity's docs](https://docsend.com/view/bwiczmy).

### How redemption works?

As the case may be, there exist two scenarios:

> Imagine LSD is priced at `$2,000 and BaseRate 0% + redemption fee 0.5%`

#### For partial redemption: 

#### `Before redemption:`

Alice minted `100,000 wenUSD` with collateral of `150 LSD` and CR <mark style="color:green;">`300%`</mark>

Bob minted `50,000 wenUSD` with collateral of `50 LSD` and CR <mark style="color:green;">`200%`</mark>

Charlie minted `40,000 wenUSD` with collateral of `30 LSD` and CR <mark style="color:green;">`150%`</mark>

David wanna redeem `10,000 wenUSD` for LSD&#x20;

#### `After redemption:`

Alice has still `100,000 wenUSD` with collateral of`150 LSD` and CR <mark style="color:green;">`300%`</mark><mark style="color:orange;">(unaltered)</mark>

Bob has still `50,000 wenUSD` with collateral of `50 LSD` and CR <mark style="color:green;">`200%`</mark><mark style="color:orange;">(unaltered)</mark>

Charlie's loan changed to `30,000 wenUSD`<mark style="color:red;">`(reduced by 10,000)`</mark> with collateral of `25 LSD`<mark style="color:red;">`(reduced by 5)`</mark> and CR <mark style="color:green;">`167%`</mark><mark style="color:green;">(increased)</mark>, causing **no net loss**.

David got `4.975 LSD` in return.

The system charged `0.025 LSD` as redemption fees.

#### For full redemption:&#x20;

#### `Before redemption:`

Alice minted `100,000 wenUSD` with collateral of `150 LSD` and CR <mark style="color:green;">`300%`</mark>

Bob minted `50,000 wenUSD` with collateral of `50 LSD` and CR <mark style="color:green;">`200%`</mark>

Charlie minted `40,000 wenUSD` with collateral of `30 LSD` and CR <mark style="color:green;">`150%`</mark>

David wanna redeem `50,000 wenUSD` for `LSD`&#x20;

#### `After redemption:`

Alice has still `100,000 wenUSD` with collateral of`150 LSD` and CR <mark style="color:green;">`300%`</mark><mark style="color:orange;">(unaltered)</mark>

Bob's loan changed to `40,000 wenUSD`<mark style="color:red;">`(reduced by 10,000)`</mark> with collateral of `45 LSD`<mark style="color:red;">`(reduced by 5)`</mark> and CR <mark style="color:green;">`225%`</mark><mark style="color:green;">(increased)</mark> (partial redemption for Bob)

Charlie's trove is closed, leaving 0 loan and `10 LSD`. Since Charlie still minted `40,000 wenUSD` he suffers <mark style="color:green;">**no net loss**</mark> from full redemption .

David got `24.875 LSD` in return.

The system charged `0.125 LSD` as redemption fees.

### Will the trove owner lose money if being redeemed against?&#x20;

Under such a circumstance, the owner **won't** experience a net loss while the collateral exposure would decrease accordingly.&#x20;

Additionally, the collateral ratio of the Trove will be improved after the redemption.

### Why are there redeemers even charged by a fee?

The redemption mechanism serves several purposes:

1. **Stability** - By charging a fee, WEN protocol discourages frequent and excessive redemptions, which helps maintain the stability of the `wenUSD`.&#x20;
2. **Sustainability** - The fees collected from redeemers contribute to the sustainability of the the system, which can be used to cover potential losses in case of liquidations or other protocol events, ensuring the system remains robust and operational.
3. **Rebalance** - This function helps users decrease their exposure for `wenUSD` rather than exchange for LSDs directly.
4. **Profit** - If `wenUSD's` price falls below `$1`, redeemers can arbitrage through redemptions. Image `wenUSD = $0.98 and redemption fee = 0.5%`, every `10,000 wenUSD` redemption can make a profit of `$150.`&#x20;

{% hint style="success" %}
It's important to note that the fee is not excessive or exploitative. It's fair and transparent that is clearly disclosed to users before they initiate a redemption request. Additionally, the fee is only charged when a user successfully redeems their assets, which means that there is no risk involved for the redeemer.
{% endhint %}


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