Aqua Protocol's Redemption feature is tailored to stabilize the protocol by enabling users to exchange AquaUSD for collateral assets. This process targets accounts with a Collateral Ratio (CR) higher than 150%, as those at or below 150% are subject to liquidation.

Redemption Mechanism:

Targeting Specific CR Range:

  • Focus on Higher CRs: Redemption primarily targets accounts with a CR just above 150%, addressing positions at risk but not yet in the liquidation zone.

Redemption Process:

  • Exchange at Face Value: Users redeem AquaUSD for collateral assets (LSTs or TONcoin) at 1 AquaUSD equating to $1.

Redemption Fee:

  • Fee Rate: A 3% fee (subject to Aqua Community DAO revisions) is levied on the redeemed amount, compensating the collateral provider.

Impact on Collateral Providers:

  • Debt and Collateral Adjustment: When collateral is redeemed, the provider's debt is proportionally reduced, potentially improving their CR.

Benefits and Considerations:

Risk Management:

  • Stability Enhancement: By targeting accounts above the liquidation threshold, the process helps maintain AquaUSD's stability and its peg to the dollar.

User Implications:

  • CR Awareness: Users with a CR slightly above 150% should be aware of the potential for redemption.

User Interface Transparency:

  • Visible Redemption Risk: The Aqua Protocol interface clearly displays the amount of AquaUSD needed for redemption, based on the user's current position. This feature allows users to understand their risk level and make informed decisions.

  • The Redemption Position Indicator in Aqua Protocol indicates the required AquaUSD amount for redemption based on a user's current position. It uses a color-coded system to signal different levels of urgency and risk. The indicator's value is the sum of AquaUSD needed for redemption for all positions ahead of the user in the CR ranking.

  • Color Codes:

    • Red (≤ 20% of AquaUSD minted): Signals high urgency, suggesting an immediate need to increase the CR.

    • Yellow (> 20% and < 50% of AquaUSD minted): Indicates moderate risk, recommending a CR increase.

    • Green (≥ 50% of AquaUSD minted): Represents minimal risk, but still advises for maintaining or increasing the CR.

Examples of Redemption in Aqua Protocol

To illustrate the redemption process in Aqua Protocol, let's consider a scenario using Toncoin as collateral. We'll set the Collateral Ratio (CR) at 165% for this example.

Setting the Scene:

A user deposits Toncoins as collateral and mints AquaUSD, establishing a CR at 165%. For simplicity, let's assume the user deposits 2,500 Toncoins worth $5,350 (with each Toncoin priced at $2.14) and borrows 3,250 AquaUSD. The CR is calculated as 100% * $5,350 / $3,250 ≈ 165%.

Example of Partial Redemption:

  • Redemption Initiation: A different user opts to redeem 1,000 AquaUSD against this collateral.

  • Redemption Fee: With a 3% fee, the total redemption amount is 1,000 - (3% of 1,000) = 970 AquaUSD.

  • Collateral Adjustment: The collateral provider’s Toncoins reduce by an amount equivalent to 970 AquaUSD, which equals approximately 453.27 Toncoins (970 / $2.14). Their new Toncoin total is 2,500 - 453.27 = 2,046.73.

  • Debt Reduction: The user's debt decreases by 1,000 AquaUSD, leaving a new debt of 3,250 - 1,000 = 2,250 AquaUSD.

  • New CR: With the adjusted collateral value of approximately $4,380 (2,046.73 * $2.14), the CR is now around 195% (100% * $4,380 / $2,250).

Example of Full Redemption:

  • Full Redemption: Another user redeems the entire collateral amount of 3,250 AquaUSD.

  • Fee Calculation: The redemption fee is 3% of 3,250 AquaUSD, totaling $97.5.

  • Collateral Reduction: The reduction in collateral equates to 3,250 - $97.5 = $3,152.50, or about 1,473.13 Toncoins (3,152.50 / $2.14). The new Toncoin total is 2,500 - 1,473.13 = 1,026.87.

  • Complete Debt Clearance: The user's debt is fully cleared (3,250 - 3,250 = 0 AquaUSD).

  • Borrow Rate Fee: In full redemption, the protocol also deducts any accrued borrow rate fee from the collateral.

In Aqua Protocol, a user's exposure to redemption is capped at the total amount of their debt. This means that the maximum value that can be redeemed from any user's collateral is equivalent to their outstanding AquaUSD minted amount. This limit ensures that redemption activities are proportionate and do not exceed the user's borrowed amount, aligning with the protocol's principles of fair and balanced risk management.

During the redemption process, a portion of your collateral will be exchanged, resulting in a corresponding decrease in your debt.

These examples demonstrate the dynamics of partial and full redemptions in Aqua Protocol, highlighting how they adjust users' debt and collateral to maintain the protocol's stability and the users' CR.

How can I avoid being redeemed against?

To avoid being targeted for redemption in Aqua Protocol, it's advisable to maintain a Collateral Ratio (CR) above 200% and ensure your position is not the lowest in terms of CR (monitor The Redemption Position Indicator parameter) .

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