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Redemptions and XIM Price Stability
The ability to redeem XIM for $WETH (or WBTC) at face value (i.e. 1 XIM for $1 of $WETH) 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.
XIM also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since xDollar treats XIM 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 XIM is below $1), so too does the
baseRate— making borrowing less attractive which keeps new XIM from hitting the market and driving the price below $1.
Furthermore, xDollar also provides the option to collateralize stablecoins like USDC for XIM. For a small, 1% fee, users are able to mint or sell XIM to other stablecoins. When a user deposits USDC into the xDollar V2 platform, they will essentially be opening a special trove that accepts only USDC as collateral at a minimum collateral ratio of 101%. The liquidation and redemption functions are disabled in these troves and as long as the troves are open they remain active until users claim their USDC by simply closing them
Users can redeem their XIM for $WETH at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
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.
Under normal operation, the redemption fee is given by the formula
baseRate * Maticdrawn
Redemption fees are based on the
baseRatestate variable in xDollar, which is dynamically updated. The
baseRateincreases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of XIM.
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 xUSD supply that was redeemed
- The redemption fee is given by
baseRate * Maticdrawn
If your Trove is redeemed against, you do not incur a net loss. A redemption is the process of exchanging XIM for $WETH at face value, as if 1 XIM is exactly worth $1. That is, for x XIM you get x dollars worth of $WETH in return. However, you will lose some of your $WETH exposure. Your Trove's collateral ratio will also improve after a redemption. The Trove will be closed due to redemption if the debt left after redemption is less than
200 XIM(Ethereum), in which case the Liquidation Reserve will be used to cancel the debt.
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.