# Redemptions

Bit Protocol integrates a well-structured redemption process as a mechanism to maintain the stability of its BitUSD peg. By allowing users to redeem BitUSD for the underlying collateral and adjusting borrowing fees as necessary, Bit Protocol upholds the peg’s integrity. These features not only provide a solid foundation for BitUSD's value stability but also enhance the overall appeal and trustworthiness of BitUSD in the competitive stablecoin market.

### **Understanding the Redemption Process** <a href="#understanding-the-redemption-process" id="understanding-the-redemption-process"></a>

* **Redemption Function**: The redemption process in Bit Protocol allows users to exchange BitUSD for the underlying collateral at face value, assuming 1 BitUSD equals $1. It serves as a vital mechanism to ensure that BitUSD maintains its peg to the US dollar.
* **Redemption Mechanics**: Users redeem BitUSD for an equivalent USD value of the collateral. The redeemed collateral is taken from vaults with the lowest collateral ratios, even if those ratios are above the minimum requirement. This can extend to Vaults over 180 % in collateralization ratio - Redeeming always draws funds from the lowest Vaults in the protocol, no matter how high their ratios. Keeping an over 180 % ratio  however at all times makes it unlikely that a Vault is being drawed from. If your position is closed via redemptions against your trove (your Vault), a hard (under 150 %) liquidation, or a mix of the two, there is typically a portion of collateral available for users to claim if their vault is partially closed through redemptions. You can claim this collateral after your position has been closed in your Vault tab.&#x20;

$$
Collateral Received=bitUSD Redeemed×( 
USD Value per Collateral Unit
1
​
 )
$$

### **Peg Stability Mechanisms** <a href="#peg-stability-mechanisms" id="peg-stability-mechanisms"></a>

* **Hard Peg Mechanisms**: The ability to redeem BitUSD at face value for the underlying collateral establishes a direct price floor and ceiling, offering tangible arbitrage opportunities that help maintain the peg. Redeeming incurs a redemption fee, typically from 0,5% all the way up to 10%. This fee decreases linearly with a 12-hour half-life.
* **Soft Peg Mechanisms**: Bit Protocol employs indirect methods to ensure peg stability, including borrowing fee adjustments. For example, as redemptions increase, indicating a potential drop below peg, the borrowing fee adjusts to discourage further minting of BitUSD, helping to stabilize its price.

Borrowing Fee Rate=Base Rate+Additional Rate Based on Redemption Volumes

### **Benefits of the Redemption Feature** <a href="#benefits-of-the-redemption-feature" id="benefits-of-the-redemption-feature"></a>

* **Price Stability**: The redemption process directly contributes to the stability of the BitUSD peg, as it allows users to arbitrage discrepancies in BitUSD's market price versus its pegged value.
* **Market Confidence**: The transparent and predictable nature of the redemption process fosters user confidence in BitUSD, knowing that its value is reliably pegged to the US dollar.

### **Challenges and Considerations** <a href="#challenges-and-considerations" id="challenges-and-considerations"></a>

* **Market Dynamics**: The effectiveness of the redemption mechanism can be influenced by broader market conditions and the underlying collateral's volatility.
* **Operational Complexity**: Managing the redemption process requires sophisticated mechanisms to ensure it functions smoothly and efficiently, particularly as the ecosystem grows and diversifies.
* **Alternative Peg Mechanisms**: We will integrate multiple mechanisms to maintain the BitUSD peg in the future. This will alleviate the usage of redemptions.&#x20;
