Redemptions and PUSD Price Stability
The ability to redeem PUSD for Matic at face value (i.e. 1 PUSD for $1 of Matic) and the minimum collateral ratio of
110%create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.
PUSD also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since PolyQuity treats PUSD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying PUSD is below $1), so too does the
baseRate— making borrowing less attractive which keeps new PUSD from hitting the market and driving the price below $1.
Users can redeem their PUSD for Matic at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Trove's debt and collateral.
Under normal operation, the redemption fee is given by the formula
baseRate * Maticdrawn
Redemption fees are based on the
baseRatestate variable in PolyQuity, which is dynamically updated. The
baseRateincreases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of PUSD.
Upon each redemption:
baseRateis decayed based on time passed since the last fee event
baseRateis incremented by an amount proportional to the fraction of the total PUSD supply that was redeemed
- The redemption fee is given by
baseRate * Maticdrawn
If your Trove is redeemed against, you do not incur a net loss. A redemption is the process of exchanging PUSD for Matic at face value, as if 1 PUSD is exactly worth $1. That is, for x PUSD you get x Dollars worth of Matic in return.owever, you will lose some of your Matic exposure. Your Trove's collateral ratio will also improve after a redemption.
The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Trove's in the system. Remember: The riskiest Troves (i.e. lowest collateralized Troves) are first in line when a redemption takes place.