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

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 YUSD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. What are redemptions? 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.

How is the redemption fee calculated?

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

How is the baseRate calculated?

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?

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
$Y$
where
$Z = Y + X$
and
• $BR =$
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?

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, we will be giving 20% of the redemption fee 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.

Secondary Redemption Mechanism

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.