🏦Redemptions & MUSD Price Stability

Redemptions and MUSD Price Stability

MoonYield employs a redemption mechanism to maintain the MUSD stablecoin's soft peg to the USD. Redemptions allow MUSD holders to exchange their tokens directly for MSS collateral at face value, which helps stabilize the price of MUSD during times of market fluctuation.

What Are Redemptions?

Definition: A redemption is the process by which a MUSD holder exchanges their MUSD for MSS collateral from the system. Purpose: To ensure that MUSD maintains its value near $1.

How Redemptions Work: When an MUSD holder redeems, the following occurs: Target Vaults: The system selects the Vaults with the lowest collateral-to-debt ratio (C-R) for MSS extraction. This prioritization ensures the system eliminates the riskiest positions. The protocol calculates the MSS value to be returned based on a 1:1 peg (1 MUSD = $1 worth of MSS). Collateral Exchange: The redeemer receives MSS in exchange for their MUSD. This reduces the debt of the Vaults, and improves MoonYield's overall solvency and health. Redemption Fee: A dynamic fee is charged on the redeemed amount to discourage unnecessary redemptions and limit excessive volatility.

Example: Suppose a user redeems 1,000 MUSD. The system targets Vaults with the lowest C-R. The redeemer receives MSS equivalent to 1,000 MUSD minus the redemption fee.

Benefits of Redemptions for MUSD Price Stability: Peg Enforcement: If MUSD falls below $1, arbitrageurs can purchase MUSD at a discount on the open market and redeem it for MSS worth $1. This reduces MUSD supply and drives its price back toward $1.

Collateral Rebalancing: Redemptions reduce the system's riskiest Vaults, improving overall collateralization.

Fees and Incentives: Dynamic Redemption Fee: The redemption fee adjusts based on system health and activity to prevent abuse and maintain stability. Higher fees apply when the system is healthy, while lower fees incentivize redemptions during high-risk periods.

Market-Driven Stability: By relying on economic incentives, the redemption process leverages market forces to stabilize MUSD without requiring centralized intervention.

Impact on Users: For MUSD Holders: Redemptions ensure MUSD’s value remains stable, providing confidence in its utility as a stablecoin. Holders can use redemptions to exit their MUSD position during times of instability.

For Borrowers: Borrowers must manage their Vaults carefully, as redemptions target low C-R Vaults. Maintaining a higher collateral ratio reduces the likelihood of being targeted during redemptions.

Summary of Price Stability Mechanisms:

MoonYield achieves MUSD stability through two complementary mechanisms: Stability Pool: Ensures under-collateralized Vaults are liquidated, keeping the system solvent. Redemptions: Allows direct conversion of MUSD to MSS, enforcing the MUSD peg and incentivizing arbitrage.