# Redemptions {% hint style="info" %} ### Don't feel like reading? Watch [this video](https://youtu.be/XeA5dZEJkkM?si=zroMMY1Merr3McuS) on how Flux keeps peg using Redemptions {% endhint %} ## What are Redemptions? Redemptions play a **critical role** in maintaining **fUSD’s peg to the US Dollar** by ensuring that 1 fUSD is always backed by **$1 worth of collateral**. This mechanism operates **entirely on-chain**, without relying on centralized entities or third-party custodians. At its core, a redemption allows a user to **swap fUSD for collateral (XRD, LSULP) at face value**, treating **1 fUSD as exactly $1**. While redemptions can be initiated by anyone at any time, they are typically **only profitable when fUSD is trading below $1**. **How Redemptions Work:** 1. The redeemer **sends fUSD to the protocol**. 2. In return, they receive a **mix of collateral (XRD, LSULP)** minus a small **redemption fee**. 3. The collateral is sourced **from borrower's loans**, starting with **loans that are paying the lowest interest rate**. The redeemed amount per collateral is chosen based on their current Flux Reservoir backing (learn more). ## What if two loans have the same interest rate? If two loans have the same interest rate, the loan with the highest LTV is chosen first to redeem. ## When can Redemptions occur? Redemptions **can technically happen at any time**, but in practice, they occur **when it is profitable**. **Most likely scenario:** When **fUSD trades below $1** (minus the redemption fee), arbitrageurs can redeem fUSD for its underlying collateral at a **discount**, making it an attractive opportunity. Since redemptions increase demand for fUSD and reduce its circulating supply, they **naturally help restore the peg**. ## Who can initiate a Redemption? **Anyone** with a sufficient balance of fUSD can initiate a redemption. However, in practice, **redemptions are expected to be performed primarily by professional bots** rather than manual traders. This ensures redemptions happen **quickly and efficiently**, keeping fUSD stable and liquid. ## What happens if my loan gets redeemed? A redemption works similarly to **someone else repaying your debt** while claiming an equivalent portion of your collateral in return. When this happens, an amount of your debt **equal to the redeemed collateral in USD terms** is repaid. The redeemer receives your collateral, minus the **redemption fee**, which remains in your loan. Because redemptions happen when fUSD is trading below $1, this process can even result in a slight **profit** for you, as your debt is reduced at a discount. **Example (XRD at $0.50):** * **Before Redemption:** 100,000 XRD collateral, 20,000 fUSD debt * **After Redemption:** 71,000 XRD collateral, 5,000 fUSD debt Your **collateral and debt are reduced equally** in USD terms, while the **redemption fee (1,000 XRD in this example) is added back** to your collateral. ## How do Redemptions work with multiple collaterals? Instead of allowing redeemers to freely choose which collateral to claim, the system **optimizes redemptions** in a way that strengthens fUSD’s overall backing. Redemptions begin by targeting **loans with the lowest interest rates** in each collateral market. This process continues **until the full amount of fUSD being redeemed is exchanged for collateral**. Redemptions can be **partial or full**, depending on the amount of fUSD involved and the debt structure of the affected loans. For example, in a scenario where redemptions occur across multiple collateral markets: * In the **XRD market**, one loan is fully redeemed, while another is partially redeemed. * In the **LSULP market**, two loans are fully redeemed. This structured approach ensures **fair and efficient** liquidation of collateral while protecting the system from instability. ## How is the Redemption collateral split determined? The proportion of collateral used in redemptions is **not fixed** but **dynamically adjusted** to maximize the economic safety of the system. The underlying principle is simple: **riskier collateral types absorb more redemptions** to prevent potential bad debt. The system calculates risk based on the **size of each collateral market’s Flux Reservoir relative to its total debt**. If a market’s Flux Reservoir is small compared to the total borrowed debt, it is considered **riskier**, meaning a larger share of redemptions will be allocated to it. For instance, if the **outside debt** (calculated as: `total debt - fUSD in collateral's` Flux Reservoir) across collateral types is: * 100 fUSD for LSULP * 50 fUSD for XRD Then a **redemption** would result in the following collateral distribution: * **66.67% from LSULP** * **33.33% from XRD** This mechanism ensures that the system remains resilient, even in extreme market conditions, by **dynamically balancing risk** across all collateral types. ## Is there a Redemption Fee? Yes, redemptions come with a **fee**, similar to the STAB Protocol. The **redemption fee remains with borrowers** as part of their collateral. The **redemption fee is deducted from the total XRD/LSULP** withdrawn during a redemption. Different than with the STAB Protocol, the fee is calculated based on a **dynamic rate** that increases with each redemption and then **decays exponentially** over time, with a **half-life of six hours**. Each time x fUSD is redeemed, the dymanic rate: * **Decays based on time** since the last redemption * **Increases** proportionally to the fraction of the total fUSD supply redeemed (`x / total_fUSD_supply`) This dynamic structure means that **fees are higher when redemptions happen frequently** but decrease quickly if redemptions slow down. ## How can I stay protected from Redemptions? Your **risk of redemption** depends on two main factors: 1. **The interest rate you set** 2. **The price of fUSD** **1. Interest Rate and Redemption Order** Your interest rate determines how far down the line you are for redemptions. The higher your interest rate, the more fUSD needs to be redeemed before your Trove is affected. For example, if the front-end shows 41M fUSD ahead of you, this means that 41M fUSD must be redeemed before your collateral is affected. Dashboards to monitor historic redemption volume are on the roadmap. **2. The Price of fUSD** Redemptions typically only happen when fUSD trades below $1. If fUSD is above $1, redemptions are unprofitable, and they should pause entirely. If demand for fUSD remains high—you can lower your interest rate safely without increasing your risk of redemption.