mkUSD/ULTRA maintains a close association with usd due to its redeemability for collaterals at face value (i.e., 1 mkUSD/ULTRA can be exchanged for $1 worth of a collateral of choice), and the mandated minimum collateral ratio of 110%. 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/ULTRA 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/ULTRA 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/ULTRA is below $1), the base rate also increases — thus making borrowing less appealing, which prevents new mkUSD/ULTRA from flooding the market and driving the price below $1.
A redemption refers to the act of exchanging mkUSD/ULTRA for collateral at face value, assuming 1 mkUSD/ULTRA is exactly equal to $1. Therefore, for X mkUSD/ULTRA, you receive X Dollars worth of collateral in return.
Users are free to redeem their mkUSD/ULTRA 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.
Redemption fee calculation
Under normal circumstances, the redemption fee is calculated using the formula:
(baseRate + 0.5%) * CollateralDrawn
Redemption 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/ULTRA issuance (fee event).
Each redemption causes the following changes:
The baseRate experiences decay relative to the time passed since the last fee event.
The baseRate increases by an amount in proportion to the fraction of the total mkUSD/ULTRA supply that was redeemed.
Redemptions effect on vaults
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.