🏦Redemptions & BUD Price Stability

Redemptions and BUS Price Stability

BOOKUSD employs a redemption mechanism to maintain the BUD stablecoin's soft peg to the USD. Redemptions allow BUD holders to exchange their tokens directly for BOOK collateral at face value, which helps stabilize the price of BUD during times of market fluctuation.

What Are Redemptions?

Definition: A redemption is the process by which a BUD holder exchanges their BUD for BOOK collateral from the system. Purpose: To ensure that BUD maintains its value near $1.

How Redemptions Work: When an BUD holder redeems, the following occurs: Target Troves: The system selects the Vaults with the lowest collateral-to-debt ratio (C-R) for BOOK extraction. This prioritization ensures the system eliminates the riskiest positions. The protocol calculates the BOOK value to be returned based on a 1:1 peg (1 BUD = $1 worth of BOOK). Collateral Exchange: The redeemer receives BOOK in exchange for their BUD. This reduces the debt of the troves, and improves BOOKUSDs overall solvency and health. Redemption Fee: A dynamic fee is charged on the redeemed amount to discourage unnecessary redemptions and limit excessive volatility.

Example: Suppose a user redeems 1,000 BUD. The system targets troves with the lowest C-R. The redeemer receives BOOK equivalent to 1,000 BUD minus the redemption fee.

Benefits of Redemptions for BUD Price Stability: Peg Enforcement: If BUD falls below $1, arbitrageurs can purchase BUD at a discount on the open market and redeem it for BOOK worth $1. This reduces BUD supply and drives its price back toward $1.

Collateral Rebalancing: Redemptions reduce the system's riskiest troves, improving overall collateralization.

Fees and Incentives: Dynamic Redemption Fee: The redemption fee adjusts based on system health and activity to prevent abuse and maintain stability. Higher fees apply when the system is healthy, while lower fees incentivize redemptions during high-risk periods.

Market-Driven Stability: By relying on economic incentives, the redemption process leverages market forces to stabilize BUD without requiring centralized intervention.

Impact on Users: For BUD Holders: Redemptions ensure BUD’s value remains stable, providing confidence in its utility as a stablecoin. Holders can use redemptions to exit their BUD position during times of instability.

For Borrowers: Borrowers must manage their troves carefully, as redemptions target low C-R troves. Maintaining a higher collateral ratio reduces the likelihood of being targeted during redemptions.

Summary of Price Stability Mechanisms:

BOOKUSD achieves BUD stability through two complementary mechanisms: Stability Pool: Ensures under-collateralized troves are liquidated, keeping the system solvent. Redemptions: Allows direct conversion of BUD to BOOK, enforcing the BUD peg and incentivizing arbitrage.