Can I Get REKT If My Vault Gets Redeemed Against?!
What happens if my vault gets redeemed against?
Can I get Rekt?
The short answer is no, and it can even protect you.
It’s a bit complicated, but I will explain it simply.
What Happens During a Redemption?
During a redemption, a user decides to swap 1 USDL, regardless of its market value, for $1 worth of PLS.
But where does the PLS come from?
It comes from the lowest collateralized vault(s).
For example, let’s say there are three vaults at 110.5% collateral ratio:
- Vault 1 has 110,500 USD worth of PLS and 100,000 USDL in debt
- Vault 2 also has 110,500 USD worth of PLS and 100,000 USDL in debt
- Vault 3 has 221,000 USD worth of PLS, and 200,000 USDL in debt
If a user redeems 300,000 USDL, they will perform a full redemption on Vaults 1 and 2, and a partial redemption on Vault 3.
Effectively, a user has burned 35,000 USDL, canceled out 35,000 USDL worth of debt, and received 35,000 USD worth of PLS.
Is Getting Redeemed Against the Same As a Liquidation?
No!
A user can only redeem a value of PLS which is equal to the debt of that individual vault.
For example, if Vault 1 has 110,000 PLS, and they minted 90,000 USDL, the redeemer can only get 90,000 USD worth of PLS out of that vault.
If they do cancel the full debt, then the vault and closes the extra 20,000 USD worth of PLS goes to the Collateral Surplus Pool where it awaits collections.
This makes redemptions different from liquidations because:
In Liquidations
- You lose all of your PLS
- But you keep all of your debt
In Redemptions
- You lose the value of PLS proportional to your debt
- You keep your debt
- You keep the left over PLS
Implications for the Redeemed-Against Vault
When considering the implications of a redeemed-against vault, you have to consider whether it was a full redemption or a partial redemption.
Full Redemption
In a full redemption, it’s basically like another user decides to pay back the debt and close your vault for you.
There is no instant loss in value, like in a liquidation, it’s basically breaking even and losing some price exposure to PLS.
There is also a way to frame getting redeemed against as a good thing.
For example, if your vault undergoes a full redemption at 110.5% collateral ratio, you will have saved that top 10.5% if the price dipped a minute later so that your vault is below 110%.
Partial Redemption
In a partial redemption, it’s essentially like another user decides to alleviate your collateral ratio and repay your debt.
As a result you will lose some price exposure to PLS, but you will not have an instant loss in value.
For example, if you have 110,500 USD worth of PLS and a debt of 100,000 USDL, you have a collateral ratio of 110.5%.
Now let’s say a user redeems 50,000 USDL against your vault in a partial redemption.
Now you have a vault with 60,500 USD worth of PLS with a debt of 50,000 USDL which creates a collateral ratio of 121%.
Because of the redemption, you have alleviated your dangerously close collateral ratio and decreased your price exposure to PLS.
But remember, you still have the 100,000 USDL that you originally minted, assuming you never lost it.
If you want to return to your original collateralized position, you can buy an 50,000 USD worth of PLS off the market with 50,000 USDL and re-collateralize it.
