What is a redemption mechanism?

Anil333

"LUSD also has a stability mechanism known as redemption. Redemption allows any holder of LUSD, whether acquired through collateralized borrowing or not, to exchange $1 LUSD for $1 worth of ETH at any time.

The redemption process starts with the highest-risk positions. When redemption is initiated, it proceeds through several steps. All Troves are ranked from the lowest collateralization ratio to the highest, from highest risk to lowest risk.

The redeemed LUSD is used to repay the debt of the highest-risk Trove(s) in exchange for their collateral. The remaining collateral of the Trove owner is retained by them. If more ETH needs to be redeemed, the system looks for the next highest-risk Trove. Therefore, the redemption mechanism positively affects the overall collateral in the system, enhancing system robustness.

Additionally, the protocol's base rate increases with each user redemption, meaning both borrowing costs and redemption fees increase. This serves two purposes: preventing large-scale redemptions and reducing borrowing, further promoting a reduction in the circulation of $LUSD to aid price stability. However, compared to other stablecoins, the price of $LUSD exhibits larger fluctuations."

Samiksha

Absorb knowledge.

Pundarik1313

I've heard about this in real life.