🌟Instant Redemption
Last updated
Last updated
A redemption is the process of exchanging GAI for the collateral asset (e.g. ETH) at face value, as if 1 GAI is exactly worth $1. That is, for x GAI you get x Dollars worth of asset in return.
Users can redeem their GAI for the collateral asset at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
Taking ETH as a collateral example, if the current redemption fee is 1%, assume the price of ETH is $500 and you redeem 100 GAI, you would get 0.198 ETH (0.2 ETH minus a redemption fee of 0.002 ETH).
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.
The ability to redeem GAI for the collateral assets at face value (i.e. 1 GAI for $1 of the collateral asset) and the minimum collateral ratio for the corresponding asset, jointly create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.
GAI also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Goku Money treats GAI 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 GAI is below $1), so too does the baseRate — making borrowing less attractive which keeps new GAI from hitting the market and driving the price below $1.
No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their Vault's debt and collateral.
Under normal operation, the redemption fee is given by the formula (baseRate + 0.5%) * collateral drawn.
Redemption fees are based on the baseRate state variable in Goku Money, 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 GAI.
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 GAI supply that was redeemed
The redemption fee is given by (baseRate + 0.5%) * collateral drawn.
If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your collateral exposure. Your Vault's collateral ratio will also improve (i.e. increase) after a redemption.
When GAI is redeemed, the collateral asset provided to the redeemer is allocated from the Vault(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption you have the Vault with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The USD value by which your collateral is reduced corresponds to the nominal GAI amount by which your Vault's debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected Vaults, making them less risky.
Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off a Vault's debt are called full redemptions. In such a case, your Vault is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
Let’s say you own a Vault with 2 ETH collateralized and a debt of 3,200 GAI. The current price of ETH is $2,000. This puts your collateral ratio (CR) at 125% (= 100% * (2 * 2,000) / 3,200). Let’s imagine this is the lowest CR in the Goku Money system and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
Somebody redeems 1,200 GAI for 0.6 ETH and thus repays 1,200 GAI of your debt, reducing it from 3,200 GAI to 2,000 GAI. In return, 0.6 ETH, worth $1,200, is transferred from your Vault to the redeemer. Your collateral goes down from 2 to 1.4 ETH, while your collateral ratio goes up from 125% to 140% (= 100% * (1.4 * 2,000) / 2,000).
Example of a full redemption
Somebody redeems 6,000 GAI for 3 ETH. Given that the redeemed amount is larger than your debt minus 10 GAI (set aside as a Liquidation Reserve), your debt of 3,200 GAI is entirely cleared and your collateral gets reduced by $3,190 of ETH, leaving you with a collateral of 0.405 ETH (= 2 - 3,190 / 2,000).
The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Vaults in the system. Remember: The riskiest Vaults (i.e. lowest collateralized Vaults) are first in line when a redemption takes place.
