Comment on page

Redemptions and LCNY Price Stability

How does LCNY closely follow the price of CNY?

The ability to redeem LCNY for ETH at face value (i.e. 1 LCNY for 1 CNY of ETH) 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.
LCNY also benefits from less direct mechanisms for CNY parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Alternity treats LCNY as being equal to CNY, 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 LCNY is below CNY), so too does the baseRate — making borrowing less attractive which keeps new LCNY from hitting the market and driving the price below CNY.

What are redemptions?

A redemption is the process of exchanging LCNY for ETH at face value, as if 1 LCNY is exactly worth 1 CNY. That is, for x LCNY you get x Yuan worth of ETH in return.
Users can redeem their LCNY for ETH at any time without limitations. However, a redemption fee might be charged on the redeemed amount.
For example, if the current redemption fee is 1%, the price of ETH is 5,000 CNY and you redeem 1,000 LCNY, 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.

Is a redemption the same as paying back my debt?

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?

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

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable in Alternity, 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 LCNY.
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 LCNY supply that was redeemed
  • The redemption fee is given by (baseRate + 0.5%) * ETHdrawn

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 ETH exposure. Your Trove's collateral ratio will also improve after a redemption.

How can I avoid being redeemed against?

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.