> For the complete documentation index, see [llms.txt](https://docs.vaultedge.fi/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.vaultedge.fi/the-protocol/borrowing/risk-methodology.md).

# Risk methodology

### Redemptions vs Liquidations

Vaultedge uses two distinct mechanisms to maintain collateralization and peg stability: **Redemptions** and **Liquidations**.

#### What is a Redemption?

A **Redemption** allows any USDVE holder to redeem their USDVE for collateral from the vaults with the **lowest collateral ratios** in the system. This reduces the supply of USDVE and helps maintain its peg close to one dollar.

Unlike a liquidation, redemptions do not require a vault to fall below the Minimum Liquidation Ratio (MLR). Instead, vaults are prioritized by their **Individual Collateral Ratio (ICR)**. The lower the ICR, the more likely that vault is to be redeemed against.

#### What Happens During a Redemption?

* A USDVE holder sends USDVE to the protocol and requests to redeem it for collateral
* The protocol identifies the vaults with the **lowest ICRs** and starts redeeming collateral from those vaults
* Collateral is transferred from the vaults to the redeemer
* The vault’s debt is reduced proportionally, improving its ICR
* The redeemed USDVE is burned

{% hint style="danger" %}
Vaults that are redeemed against **do not incur a net financial loss**, but the user **loses exposure to their collateral**. 
{% endhint %}

This means they still hold their remaining USDVE, but they no longer hold the full amount of their originally deposited collateral.

#### How to Avoid Being Redeemed Against

The best way to avoid redemption is to maintain a **high ICR** compared to other vaults in the system. Vaults with the lowest ICR are first in line to be redeemed.

In the interface, Vaultedge displays a **Debt Ahead** metric, showing how much USDVE needs to be redeemed before your vault is impacted.

Vaultedge continuously updates collateral prices using a decentralized oracle network. If the **Individual Collateral Ratio (ICR)** of a vault falls below the required thresholds, it becomes subject to liquidation through a multi-stage automated process.

### Liquidation Flow

| ICR                                               | Stage                 | Process                                                                                                                           |
| ------------------------------------------------- | --------------------- | --------------------------------------------------------------------------------------------------------------------------------- |
| **MCR > ICR > CCR**                               | Discounted Redemption | The vault enters the redemption queue. Anyone can redeem USDVE for the collateral at a small discount based on the vault's ICR.   |
| **MCR > ICR**                                     | Stability pool        | the stability pool will repay the vaults' debt and receive the collateral [read more](/the-protocol/borrowing/stability-pool.md). |
| **MCR > ICR**  & stability pool without liquidity | Redistribution        | the redistribution mechanism will take place [read more](/the-protocol/borrowing/stability-pool.md).                              |

Once a vault falls below the **MCR**, it is considered **under-collateralized** and automatically sent into liquidation.

{% hint style="success" %}
The entire liquidation process is **fully automated and permissionless**, ensuring rapid execution without human intervention.
{% endhint %}

### What Are Liquidations?

Liquidation ensures that the supply of USDVE remains fully backed by collateral at all times. If a vault becomes unsafe by falling below the **Minimum Colalteral Ratio (MCR)**, the protocol takes the following actions:

* The vault is closed
* Its debt is absorbed by the **Stability Pool** (or redistributed if needed)
* Its collateral is transferred to **Stability Providers**

The **vault owner keeps their USDVE** but loses their collateral. They can no longer recover the collateral by repaying the loan.

{% hint style="danger" %}
**Liquidations result in a net loss for the vault owner.**
{% endhint %}

**Deppeg Mitigation Process:**

If **USDVE falls below $1**, the redemption mechanism is designed to incentivize buying pressure. Users can redeem USDVE for discounted collateral, which should restore demand and return USDVE to its peg.

However, if not enough vaults are eligible for redemption, and demand remains low, Vaultedge can dynamically raise the **Critical Collateral Ratio (CCR)**. This means more vaults with higher ICRs become redeemable.

Importantly, these redemptions **do not result in net losses** for the vaults being redeemed. Instead, they are treated as early partial repayments with collateral exchanged at a slight premium.

The **CCR** will continue to rise until redemption demand is sufficient to restore the peg.