How Redemptions Work

A Redemption is the act of swapping ERN tokens with the system in return for an equivalent value of collateral, and protects ERN from falling considerably below $1. Redeemers pay off debt on behalf of users, in exchange for collateral, resulting in no net loss for users. Redemption occurs separately for each collateral type. There are four key considerations when discussing redemptions:

  1. Any wallet with an ERN token balance may redeem, whether or not they are a borrower.

  2. Any redemption incurs a variable fee. While ERN is at $1, redemption is not profitable ╴swapping 1000 ERN valued at $1000 for $1000 of ETH, less a fee, is not a desirable trade. This means that redemption is only profitable when ERN is below $1. If ERN is trading at $0.99, 1000 ERN is worth $990. Swapping it for $1000 worth of ETH, will generate profit of $10, less the fee.

  3. The fee is set at 0.5%, however it may scale up with high demand. In the example above, swapping 1000 ERN valued at $990 for $1000 of ETH will incur a fee of $5. The redemption fee ($5 worth of ETH) goes to bOATH stakers and the redeemer nets a $5 gain.

  4. From a user perspective, when ERN is redeemed, the collateral is always withdrawn from the lowest collateralized positions, per collateral, in ascending order of their collateral ratio. This means that healthy positions may be redeemed if they are relatively less-collateralized. It is important to note that when a user’s collateral is redeemed, the ERN used for redemption is reduced from their debt. If a user’s position had $3000 of ETH as collateral and 2000 ERN debt, and was used in the redemption example above, then they would be left with $2000 of ETH and 1000 ERN debt. While the user’s exposure to ETH has changed, their position’s absolute value remains unchanged.

Users are able to monitor their position’s health relative to others using the analytics page on Ethos Reserve, to avoid getting redeemed if undesired. Additions to the analytics page regarding redemptions and other metrics are currently in development.

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