Redemption

What are redemptions?

A redemption is the process of exchanging TAL for ckBTC at face value as if 1 TAL is exactly worth $1. That is, for x TAL you get x Dollars worth of ckBTC in return.

Users can redeem their TAL for ckBTC 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 ckBTC is $500 and you redeem 100 TAL, you would get 0.198 ckBTC (0.2 ckBTC minus a redemption fee of 0.002 ckBTC).

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. Read more about redemptions here.

Is 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 Vault's debt and collateral.

How is the redemption fee calculated?

Under normal operation, the redemption fee is given by the formula:

(baseRate + 0.5%) * ckBTCdrawn

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable in Liquity, which is dynamically updated. The baseRate increases with each redemption, and decay according to the time passed since the last fee event - i.e. the last redemption or issuance of TAL.

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 TAL supply that was redeemed

• The redemption fee is given by (baseRate + 0.5%) * ckBTCdrawn

As a borrower, do I lose money if I'm redeemed against?

If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your ckBTC exposure. Your Vault'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 Vaults in the system. Remember: The riskiest Vaults (i.e. lowest collateralized Vaults) are first in line when a redemption takes place.

Please note that although the system is diligently tested, a hack or a bug that results in losses for the users can never be fully excluded.