📌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.

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 300%

Bob minted 50,000 wenUSD with collateral of 50 LSD and CR 200%

Charlie minted 40,000 wenUSD with collateral of 30 LSD and CR 150%

David wanna redeem 10,000 wenUSD for LSD

After redemption:

Alice has still 100,000 wenUSD with collateral of150 LSD and CR 300%(unaltered)

Bob has still 50,000 wenUSD with collateral of 50 LSD and CR 200%(unaltered)

Charlie's loan changed to 30,000 wenUSD(reduced by 10,000) with collateral of 25 LSD(reduced by 5) and CR 167%(increased), causing no net loss.

David got 4.975 LSD in return.

The system charged 0.025 LSD as redemption fees.

For full redemption:

Before redemption:

Alice minted 100,000 wenUSD with collateral of 150 LSD and CR 300%

Bob minted 50,000 wenUSD with collateral of 50 LSD and CR 200%

Charlie minted 40,000 wenUSD with collateral of 30 LSD and CR 150%

David wanna redeem 50,000 wenUSD for LSD

After redemption:

Alice has still 100,000 wenUSD with collateral of150 LSD and CR 300%(unaltered)

Bob's loan changed to 40,000 wenUSD(reduced by 10,000) with collateral of 45 LSD(reduced by 5) and CR 225%(increased) (partial redemption for Bob)

Charlie's trove is closed, leaving 0 loan and 10 LSD. Since Charlie still minted 40,000 wenUSD he suffers no net loss 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?

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

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.

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.

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.