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Redemptions and vUSD Price Stability

How does vUSD closely follow the price of USD?​

The ability to redeem vUSD for wSMR at face value (i.e. 1 vUSD for $1 of wSMR) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.

vUSD also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Virtue treats vUSD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying vUSD is below $1), so too does the baseRate — making borrowing less attractive which keeps new vUSD from hitting the market and driving the price below $1.

Read more about the price stability of vUSD.

What are redemptions?​

A redemption is the process of exchanging vUSD for wSMR at face value, as if 1 vUSD is exactly worth $1. That is, for x vUSD you get x Dollars worth of wSMR in return.

Users can redeem their vUSD for wSMR at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

For example, if the current redemption fee is 1%, the price of wSMR is $500 and you redeem 100 vUSD, you would get 0.198 wSMR (0.2 wSMR minus a redemption fee of 0.002 wSMR).

Note that the redeemed amount is taken into account for calculating the base rate and might have an impact on the redemption fee, especially if the amount is large.

Read more about redemptions below.

Is a redemption the same as paying back my debt?​

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their position's debt and collateral.

How is the redemption fee calculated?​

Under normal operation, the redemption fee is given by the formula (baseRate + 0.5%) * wSMRDrawn

How is the baseRate calculated?​

Redemption fees are based on the baseRate state variable in Virtue, which is dynamically updated. The baseRate increases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of vUSD.

Upon each redemption:

  • baseRate is decayed based on time passed since the last fee event
  • baseRate is incremented by an amount proportional to the fraction of the total vUSD supply that was redeemed
  • The redemption fee is given by (baseRate + 0.5%) * wSMRdrawn

As a borrower, do I lose money if I'm redeemed against?​

If your position is redeemed against, you do not incur a net loss. However, you will lose some of your wSMR exposure. Your position's collateral ratio will also improve after a redemption.

How can I avoid being redeemed against?​

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the position's in the system. Remember: The riskiest positions (i.e. lowest collateralized positions) are first in line when a redemption takes place.