Redemptions

The first line of defense

How does USDVE closely follow the price of USD?

Vaultedge maintains USDVE’s stability around one dollar using a combination of overcollateralization, isolated vault risk parameters, and a dynamic redemption mechanism. When USDVE trades below its target peg, users are incentivized to redeem USDVE for collateral from the riskiest Vaults in the system. This reduces USDVE supply, restores demand, and helps push the price back toward one dollar.

Additionally, Vaultedge can dynamically adjust the Critical Collateral Ratio (CCR) to expand the set of redeemable Vaults during moments of severe market dislocation.

What are discounted redemptions?

A Discounted Redemption allows any USDVE holder to exchange their USDVE for collateral taken from Vaults with an ICR below the CCR. In doing so, they burn USDVE and receive collateral at a discount. This mechanism ensures that USDVE remains fully backed and close to its peg while also strengthening system health by targeting risky positions first.

Redemptions are not the same as repaying your own loan. Instead, they are a protocol-driven rebalancing event where USDVE holders repay someone else's debt and receive collateral in return.

Vaults cannot be redeem if the ICR of the vault is higher than the CCR

The discount is calculated using the following equation (The discount is expressed as a percentage):

$$\text{Discount} = \begin{cases} \frac{\text{CCR} - \text{ICR}}{\text{MCR} - \text{MCR}}, & \text{if } \text{ICR} < \text{CCR} \\ 0, & \text{otherwise} \end{cases}$$

How Does the Discount Work?

The redemption discount decreases as a vault's Individual Collateral Ratio (ICR) increases. Vaults with an ICR at or above the Critical Collateral Ratio (CCR) are not eligible for redemptions and receive a 0% discount.

The lower the ICR (closer to the Minimum Collateral Ratio (MCR)), the higher the discount applied to the collateral during redemption. This ensures that only risky or undercollateralized vaults are impacted and encourages healthy collateralization.

What Happens When My Vault Is Redeemed?

When a redemption occurs, the protocol uses USDVE from the redeemer to repay a portion of your debt. In return, the corresponding amount of your collateral (based on the calculated discount) is transferred to the redeemer.

• Your vault’s debt decreases

• Your collateral balance decreases

• Your ICR improves

This process is automatic and permissionless, and the amount of collateral removed is proportional to the amount of debt repaid.

Do I Lose Money If My Vault Is Redeemed?

If your vault is redeemed, you may incur a net loss depending on your ICR and the discount applied. The lower your ICR, the higher the discount applied to the collateral taken, and the greater your loss.

However, redemptions also improve your vault’s health by reducing your debt and raising your collateral ratio. This makes your position more resilient and less likely to be redeemed or liquidated in the future.