Redemption fee (redeemer side)
Trove risk (borrower side)
Full breakdown
| Metric | Value |
|---|
Why redemption isn't a liquidation
Most CDP-style stablecoins only give you one lever to keep the peg near $1: liquidate undercollateralized positions and hope arbitrage does the rest. Liquity (LUSD, and the same mechanic carried into V2's BOLD) adds a second, gentler lever — redemption. Anyone holding the stablecoin can redeem it directly against the protocol for $1 of collateral, no matter how healthy their own position is or isn't. The protocol always serves this request against the trove(s) sitting at the lowest collateral ratio first, because closing out the riskiest debt first does the most for system-wide solvency. Crucially, both the debt and the collateral of the redeemed trove shrink by the same dollar amount, so the borrower's own collateral ratio barely moves — there's no penalty, just an involuntary partial payoff of the loan.
The redemption fee exists to stop this mechanism from being spammed or abused as a cheap way to unwind large stablecoin positions instantly. It's built from two moving parts: a base rate that decays exponentially (roughly halving every 12 hours) if nobody redeems, and a size-sensitive kicker equal to the redeemed amount as a fraction of the total stablecoin supply. Redeem a small amount when the base rate has decayed to near-zero, and the fee sits close to the protocol floor (0.5% in V1). Redeem a huge chunk right after someone else already redeemed, and the fee spikes — pushing large redeemers to split their flow over time instead of draining the peg's backing in one transaction.
For borrowers, the practical takeaway is the ICR ranking, not the fee — you never pay the redemption fee, the redeemer does. What determines whether you're likely to get redeemed against is simply how your collateral ratio stacks up against everyone else's: sit near the MCR floor and you're near the front of the queue; keep a healthy buffer above the CCR and redemptions will burn through many other troves before they ever reach yours.
FAQ
What is Liquity's redemption mechanism, and how is it different from a liquidation?
Redemption is not a penalty and doesn't require your trove to be undercollateralized. Anyone holding LUSD (or BOLD in Liquity V2) can redeem it for the underlying collateral (ETH or another accepted asset) at face value — 1 stablecoin buys $1 of collateral, minus a redemption fee. The protocol always redeems against the trove(s) with the lowest collateral ratio (ICR) first, since redeeming there does the most good for the system's overall health. Your debt and collateral both shrink by the redeemed amount at roughly the same ratio, so your ICR is largely unchanged — you're not penalized, but your loan gets partially or fully closed without your consent. A liquidation, by contrast, only hits troves that fall below the minimum collateral ratio (MCR) and comes with a real penalty.
How is the redemption fee calculated?
The fee rate is a floor (0.5% in Liquity V1) plus a base rate that moves with system activity. The base rate decays over time with roughly a 12-hour half-life — decayedBaseRate = baseRate × 0.5^(hoursSinceLastRedemption / 12) — and jumps up by (redeemed amount ÷ total stablecoin supply) every time a redemption happens. So a single large redemption spikes the fee for whoever redeems next, and the fee gradually falls back toward the floor if nobody redeems for a while. This calculator applies redemptionFee = min(1, floor + decayedBaseRate + redeemAmount/totalDebt) to the collateral drawn.
Why would my trove get redeemed against, and can I stop it?
The protocol always works through troves starting at the lowest ICR (closest to the minimum collateral ratio) and moves up the list until the redemption amount is filled. If your trove sits near the bottom of the ICR ranking, you're more exposed to being redeemed against. Raising your collateral ratio — adding collateral or repaying debt — moves you further from the front of the queue. You can't opt out of redemption entirely as long as you have an open trove with debt, but you keep the same net position value either way: less debt and proportionally less collateral, at face value, with no penalty fee charged to you as the borrower.
Does a redemption hurt the borrower whose trove got redeemed against?
Not financially in the way a liquidation does — there's no penalty charged to the redeemed borrower, and collateral and debt are removed in the same proportion (roughly preserving your ICR), so your equity in the position is intact. The redemption fee is paid entirely by the person doing the redeeming, not by the trove owner. The main cost to the borrower is involuntary: part of your leveraged position gets closed without you choosing the timing, which can matter if you wanted to stay borrowed (for a tax reason, a farming strategy, or simply because you didn't want to close yet).
Why does the redemption fee rise with the size of the redemption?
The redeemAmount/totalDebt term in the fee formula makes big redemptions relative to the outstanding stablecoin supply progressively more expensive per unit redeemed. This discourages any single actor from redeeming a huge chunk of the peg's backing in one transaction (which would spike the base rate for everyone after them) and instead nudges large redemptions to be split over time, letting the base rate decay back down between chunks. It's the same self-balancing idea as a bonding-curve slippage: the deeper you push, the more each additional unit costs.