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Rigid Redemption and mUSD Price Stability
How is mUSD hard-pegged to the price of USD?
mUSD maintains a hard peg to the price of USD through a combination of direct and indirect mechanisms. Directly, the ability to redeem mUSD for underlying GLP at face value (1 mUSD for $1 of GLP) and the minimum collateral ratio of 150% create a price floor and ceiling, respectively, through arbitrage opportunities. These are called "hard peg mechanisms".
mUSD also benefits from indirect mechanisms for USD parity, referred to as "soft peg mechanisms". One such mechanism is parity as a Schelling point. Since Meta treats mUSD as equal to USD, parity between the two is an implied equilibrium state of the protocol.
Users can take advantage of arbitrage opportunities by exchanging $1 worth of GLP for $1 mUSD when mUSD falls below $1 (mUSD is equal to $1 USD at face value).
What is Rigid Redemption?
Rigid redemption is the process of exchanging mUSD for GLP at face value, as if 1 mUSD is exactly worth $1. In other words, for
xmUSD, you get
xdollars worth of GLP tokens in return.
Users can redeem their mUSD for underlying GLP at any time without limitations. However, a 0.5% rigid redemption fee (subject to revision by the Meta Community DAO) is charged on the redeemed amount, and this fee is fully paid to the redemption provider.
If the current redemption fee is 0.5%, the price of GLP is $1, and you redeem 1,000 mUSD, you would receive 995 GLP (1,000 GLP minus a redemption fee of 5 GLP).
Is rigid redemption the same as paying back my debt?
No, rigid redemption and paying back debt are two entirely separate mechanisms. Rigid redemption involves exchanging mUSD for GLP at face value, while paying back debt is the adjustment of collateral and debt.
How is the rigid redemption fee calculated?
Under normal operation, the Rigid Redemption Fee = 0.5% * Redeemed collateral amount.
If the rigid redemption is conducted through passively generated WETH yield, there is a bonus of 0.5% paid via rebasing mechanism.
How does the rigid redemption mechanism work?
- The passively earned WETH yield by GLP tokens in the Meta Protocol can be used for rigid redemption at any time.
- Meta Protocol offers a rigid redemption service feature. If a user chooses to provide rigid redemption services, they will be incentivized through boosted yield, token airdrops, service fee compensations, and other means.
As a (minter) borrower, you can choose whether to provide rigid redemption services. You will only participate in rigid redemptions if you opt to become a redemption provider.
During the redemption process, you will lose a portion of your collateral, but your debt will be reduced accordingly as the redeemed mUSD is used to repay provider's debt.
The USD value reduction of your GLP collateral corresponds to the nominal mUSD amount decrease in your debt. You can think of redemptions as if someone else is repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions improve the collateral ratio of the affected collateral and debt, making them less risky. Redemptions that do not reduce your debt to 0 are called partial redemptions, while redemptions that fully pay off the debt are called full redemptions.
A user deposits 4,500 GLP ($4,500) as collateral and mints (borrows) 3,000 mUSD. This puts their collateral rate at 100% * 4500 / 3000 = 150%. Let's imagine this is the lowest collateral rate and look at two examples of partial and full redemptions:
Example of a partial redemption
Someone redeems your GLP using 1,500 mUSD, and the redemption fee is 0.5%. The redemption seeker gets 1,492.5 GLP in return (=1500 * 99.5% / 1), and your collateral is reduced from 4,500 GLP to 3,007.5 GLP. Your debt is now 1,500 mUSD, raising your collateral rate from 150% to 100% * 3,007.5 * 1 / 1500 = 200.5%.
Example of a full redemption
Someone redeems your 4,500 GLP using 3,000 mUSD. Given that the redemption amount is equal to your debt, your debt of 3,000 mUSD will be fully liquidated, and the collateral will be reduced by 3,000 * 0.995 worth of GLP, leaving you with 1,515 GLP of collateral (= 4,500 - 3,000 * 0.995 / 1).
What are the advantages of being a Redemption Provider?
- You can charge a 0.5% fee whenever someone redeems their mUSD against your collateral.
- You won't experience a total loss even if your collateral is redeemed. Only a part of your GLP position will be lost, and your mUSD debt will be reduced accordingly. Additionally, your collateral rate will increase to a much healthier level following the redemption.
- The yield of the META reward as a redemption provider is increased by 20%.
How can I avoid being rigidly redeemed against?
You'll only be subjected to rigid redemption once you choose to provide redemption services.