Redemptions
mkUSD maintains a close association with usd due to its redeemability for collaterals at face value (i.e., 1 mkUSD can be exchanged for $1 worth of a collateral of choice), and the mandated minimum collateral ratio of 120%. These conditions create a price floor and ceiling, respectively, through arbitrage opportunities. These are known as "hard peg mechanisms" as they rely on explicit operations.However,
mkUSD also utilizes more indirect methods to maintain usd parity — referred to as "soft peg mechanisms". One such mechanism is parity as a Schelling point. As the Prisma protocol treats mkUSD as equivalent to usd, parity between the two is an inherent equilibrium state of the system. Another mechanism is the minting fee on new debts. As redemptions rise (indicating
mkUSD is below $1), the base rate also increases — thus making borrowing less appealing, which prevents new mkUSD from flooding the market and driving the price below $1.A redemption refers to the act of exchanging
mkUSD for collateral at face value, assuming 1 mkUSD is exactly equal to $1. Therefore, for X mkUSD, you receive X Dollars worth of collateral in return.Users are free to redeem their
mkUSD for any collateral of choice among those supported by Prisma anytime without restrictions. However, a redemption fee may be imposed on the redeemed amount.For instance, if the prevailing redemption fee is
1%, the price of rETH is $500, and you redeem 100 mkUSD, you would receive 0.198 rETH (0.2 rETH less a redemption fee of 0.002 rETH).Note that the redeemed amount contributes to the calculation of the
baseRate and may influence the redemption fee, particularly for large amounts.Under normal circumstances, the redemption fee is calculated using the formula:
(baseRate + 0.5%) * CollateralDrawnRedemption fees are based on the
baseRate state variable in Vault Manager, which is dynamically updated. The baseRate rises with each redemption and decays proportionally to the time elapsed since the last redemption or mkUSD issuance (fee event).Each redemption causes the following changes:
- The
baseRateexperiences decay relative to the time passed since the last fee event. - The
baseRateincreases by an amount in proportion to the fraction of the totalmkUSDsupply that was redeemed.
If a vault is redeemed against, it does not suffer a net loss. However, its collateral exposure will decrease. The vault's collateral ratio will also improve after a redemption.
The most effective way to prevent redemption against your vault is to maintain a high collateral ratio relative to the rest of the vaults in the system. Keep in mind: The riskiest vaults (i.e., the least collateralized vaults) are targeted first when a redemption occurs.