# Redemptions and YUSD Peg

Yeti Finance utilizes Liquity’s unique economic incentives to create a robust and scalable stablecoin.

How does YUSD closely follow the price of USD? 

The ability to redeem YUSD for collateral at face value (i.e. 1 YUSD for $1 of collateral) and to mint YUSD at a `103%` against USDC create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.

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

### What are redemptions? <a href="#what-are-redemptions" id="what-are-redemptions"></a>

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

Users can redeem their YUSD for collateral at any time without limitations. However, a redemption fee is charged.

For example, if the current redemption fee is 1%, the price of collateralTokenA is $500 and you redeem 100 YUSD, you would get 0.2 collateralTokenA and pay a redemption fee of 1 YUSD (1% of redeemed amount).

The larger the redemption amount, the larger the redemption fee. This fee is paid by the redeemer.

### How can I avoid being redeemed against?  <a href="#how-can-i-avoid-being-redeemed-against" id="how-can-i-avoid-being-redeemed-against"></a>

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

The first trove to be redeemed against has the lowest Adjusted Individual Collateral Ratio ([AICR](/how-does-yeti-finance-work/definitions.md#adjusted-individual-collateral-ratio-aicr)). This depends on the makeup of your trove, and users with more stablecoins in their trove have higher AICRs. This feature is intended to make redemptions occur on stablecoins only above the TCR mark for Recovery mode, and to make the borrowing experience for stablecoin depositors better. Make sure you are aware of your AICR before opening your trove if you are worried about being redeemed against.&#x20;

### Is a redemption the same as paying back my debt?  <a href="#is-a-redemption-the-same-as-paying-back-my-debt" id="is-a-redemption-the-same-as-paying-back-my-debt"></a>

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

### How is the redemption fee calculated? <a href="#how-is-the-redemption-fee-calculated" id="how-is-the-redemption-fee-calculated"></a>

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

### How is the `baseRate` calculated? <a href="#how-is-the-baserate-calculated" id="how-is-the-baserate-calculated"></a>

Redemption fees are based on the `baseRate` state variable in Yeti Finance, 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 YUSD.

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 YUSD supply that was redeemed
* The redemption fee is given by `(baseRate + 0.5%) * collateral_drawn`

### How can I calculate the redemption fee as an arbitrageur? <a href="#how-is-the-baserate-calculated" id="how-is-the-baserate-calculated"></a>

The fee is paid in YUSD. The YUSD needed to cover the redemption amount and the fee can be calculated using this formula. The YUSD balance needed is represented by $$Z$$ to perform a redemption amount of $$Y$$

![](/files/cpcB7TPmKwezAzApm8S0)

where $$Z = Y + X$$

and&#x20;

* $$BR =$$ decayed Base Rate
* $$\beta =$$ 2
* $$S =$$Total YUSD Supply
* $$Z =$$ Redeemer balance of YUSD
* $$X =$$ YUSD Fee
* $$Y =$$Intended redemption amount

### As a borrower, do I lose money if I'm redeemed against?  <a href="#as-a-borrower-do-i-lose-money-if-im-redeemed-against" id="as-a-borrower-do-i-lose-money-if-im-redeemed-against"></a>

If your Trove is redeemed against, you *do not* incur a net loss. However, you will lose some of your collateral exposure. Your Trove's collateral ratio will also improve after a redemption. To compensate for this change, the full redemption fee is given back to the user who is redeemed against.

What about staked ibTKN rewards that the Trove owner has accumulated, but not redeemed? Yeti will unstake the ibTKNs properly so that the Trove owner will receive the interest rewards, and the ibTKNs will be then given to the redeemer. Since base ibTKN rewards are accounted for in the price, the Trove owner is not incurring any loss due to this property.&#x20;

### Secondary Redemption Mechanism <a href="#as-a-borrower-do-i-lose-money-if-im-redeemed-against" id="as-a-borrower-do-i-lose-money-if-im-redeemed-against"></a>

We also have a secondary redemption mechanism, which is intended to make it easier to arbitrage YUSD which raises the effectively YUSD price floor. The secondary mechanism allows you to choose a specific collateral from the bottom trove in the sorted troves array and only redeem against that. So if that bottom trove is collateralized by aUSDC + WAVAX + WETH, you could choose to do a partial redemption and redeem YUSD for just the aUSDC in the trove. After completing this redemption, the trove will likely no longer be the bottom trove in the system and then you can do the same thing to another trove. The redeemer can only perform this on one trove, and one collateral at a time. This will make it easier to arb the peg if YUSD trades below $1 due versus being forced to arbitrage against multiple types of assets.

**Peg Stability Module**

The Peg Stability Module is a smart contract which allows for the swap of YUSD to USDC or USDC to YUSD at a 1 to 1 ratio before fees provided there is available capacity. USDC that is stored in the PSM is deposited into Aave.

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