This section explains how redeeming ARTH would work
ARTHis redeemed, the collateral provided to the redeemer is allocated from loans with the lowest collateral ratio, even if it is above the minimum collateral ratio
During a redemption, the value by which a loan's collateral is reduced corresponds to the nominal ARTH amount by which the loan's debt is decreased.
Redemptions can be thought of as somebody else repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions help improve the collateral ratio of the affected loans, making them less risky.
There are two kinds of redemptions:
- Partial Redemptions where a loan's debt is partially reduced (not to 0).
- Full Redemptions where a loan's debt is fully reduced to 0.
In such a case, when a loan is closed, and the borrower can claim their collateral surplus and the w at any time.
Let’s say you have a loan with
200 ETHcollateralized with a debt of
3,200 ARTHand the current price of ETH is
This puts your collateral ratio (CR) at
(= 100% * (20 * 200) / 3,200). Let’s imagine this is the lowest CR in the protocol and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
60 ETHand thus repays
1,200 ARTHof your debt, reducing it from
1,200 $GMU, is transferred from your loan to the redeemer. Your collateral goes down from
200 ETH to 140 ETH, while your collateral ratio goes up from
140% (= 100% * (20 * 140) / 2,000).
A full redemption happens when the amount of
ETHis more than the amount of debt a loan has. In such situations the borrower's loan is completely closed (as it's debt is paid off by the redeemer's
ARTH), the equivalent amount of
ETHis sent back to the redeemer and the borrower's collateral (
ETH) exposure is reduced by the amount redeemed.
Example of a full redemption
300 ETH. Given that the redeemed amount is larger than your debt minus
50 ARTH(set aside as a Liquidation Reserve), your debt of
3,200 ARTHis entirely cleared and your collateral gets reduced by
3,150 $GMUof ETH, leaving you with collateral of
40 ETH (= 200 - 3,200 / 20).
In both cases, the net value of your position minus the debt remains the same, however during a redemption your exposure to the underlying asset decreases.
Under normal operation, the redemption fee is given by the formula
(baseRate + 0.5%) * collateral redeemed
Redemption fees are based on the
baseRatestate variable, which is dynamically updated. The
baseRateincreases with each redemption, and decays according to the time passed since the last fee event - i.e. the last redemption or issuance of ARTH.
Upon each redemption:
baseRateis decayed based on time passed since the last fee event
baseRateis incremented by an amount proportional to the fraction of the total ARTH supply that was redeemed
- The redemption fee is given by
(baseRate + 0.5%) * ETHdrawn
For every redemption, the
ARTHholder will have to pay a fee which is a percentage of the value being liquidated in
This acts as a method to dampen the redemption of bonds which can often create a negative price impact if done all too quickly. The stability fee is not meant to de-incentivize
ARTHholders from redeeming their bonds but rather used to control the speed at which they do so.
No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their loan's debt and collateral.
If your loan is redeemed against, you do not incur a net loss. However, you will lose some of your collateral exposure. Your loan's collateral ratio will also improve after a redemption.
The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the loans in the system. The riskiest loans (i.e. lowest collateralized loans) are first in line when a redemption takes place.