mkUSDmaintains a close association with
usddue to its redeemability for collaterals at face value (i.e., 1
mkUSDcan 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.
mkUSDalso utilizes more indirect methods to maintain
usdparity — referred to as "soft peg mechanisms". One such mechanism is parity as a Schelling point. As the Prisma protocol treats
mkUSDas 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
mkUSDis below $1), the base rate also increases — thus making borrowing less appealing, which prevents new
mkUSDfrom flooding the market and driving the price below $1.
A redemption refers to the act of exchanging
mkUSDfor collateral at face value, assuming 1
mkUSDis exactly equal to
$1. Therefore, for X
mkUSD, you receive X Dollars worth of collateral in return.
Users are free to redeem their
mkUSDfor 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
$500, and you redeem
100 mkUSD, you would receive
0.2 rETHless a redemption fee of
Note that the redeemed amount contributes to the calculation of the
baseRateand may influence the redemption fee, particularly for large amounts.
Under normal circumstances, the redemption fee is calculated using the formula:
(baseRate + 0.5%) * CollateralDrawn
Redemption fees are based on the
baseRatestate variable in
Vault Manager, which is dynamically updated. The
baseRaterises with each redemption and decays proportionally to the time elapsed since the last redemption or
mkUSDissuance (fee event).
Each redemption causes the following changes:
baseRateexperiences decay relative to the time passed since the last fee event.
baseRateincreases by an amount in proportion to the fraction of the total
mkUSDsupply 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.