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Redemption

Redemption allows VUSD to be exchanged for collateral at a 1:1 value through the protocol. This mechanism plays a key role in maintaining VUSD’s price stability, especially when its market price drifts below the intended $1 peg.

However, at launch, the redemption function will be restricted to protocol-level actors only. This precaution is designed to prevent unintended disruptions to borrowers while the system is still in its early stabilization phase.

🚧 Temporarily Restricted Access

Unlike typical swaps, redemptions directly interact with existing CDPs — reducing their debt and seizing a proportional amount of collateral. If enabled too early or used without proper understanding, it could negatively affect borrowers, especially those with lower collateral ratios.

To mitigate this, redemption will initially be limited to protocol-controlled operations. Governance may later expand access to whitelisted actors or the general public once the system matures.

🔁 How Redemption Works

When active, redemption allows users to burn VUSD in exchange for $1 worth of collateral per VUSD.

  • The redeemer may specify the collateral type (e.g. IOTA, stIOTA) they want to receive.

  • The system then targets CDPs holding that collateral, starting with the lowest collateral ratios and moving upward.

The process:

  1. The user initiates redemption and selects a collateral type

  2. VUSD is burned by the protocol

  3. The system identifies the CDP with the lowest collateral ratio for that asset

  4. That CDP’s debt is reduced by the redeemed amount

  5. The redeemer receives an equal USD value of collateral

  6. A Redemption Fee is charged and sent to the affected CDP owner as compensation

If necessary, this process continues across multiple CDPs until the full redemption amount is fulfilled.

📌 Important Notes

  • CDPs are not closed or liquidated during redemption — their debt is reduced and their collateral ratio increases, making them safer.

  • The Redemption Fee serves as compensation for the CDP owner, who involuntarily gave up a portion of their collateral in exchange for debt reduction.

  • Redemptions are settled using oracle-based system prices, not external market rates.

In short: redemption strengthens weaker CDPs, supports the VUSD peg, and balances risk across the system — while protecting borrowers through fair compensation.

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Last updated 4 days ago