Redeeming ARTH
When ARTH is redeemed, the collateral provided to the redeemer is allocated from loans with the lowest collateral ratio even if it is above the minimum collateral ratio 110%.
During a redemption, the borrower who has a loan with the lowest ratio will have to give up some of their collateral to the redeemer, but in return, their ARTH debt will be reduced accordingly. .
During a redemption, the value by which your collateral is reduced corresponds to the nominal ARTH amount by which your loan's debt is decreased.
Redemptions can be thought of as somebody else repaying your debt and retrieving an equivalent amount of your collateral. As a positive side effect, redemptions help improve the collateral ratio of the affected loans, making them less risky.
There are two kinds of redemptions:
  • Partial Redemptions where your debt is partially reduced (not to 0).
  • Full Redemptions where your debt is fully reduced to 0.

Partial Redemptions

In such a case, your loan is closed, and you can claim your collateral surplus and the Liquidation Reserve at any time.
Let’s say you have a loan with 200 MAHA collateralized with a debt of 3,200 ARTH and the current price of MAHA is 20 $GMU.
This puts your collateral ratio (CR) at 125% (= 100% * (20 * 200) / 3,200). Let’s imagine this is the lowest CR in the protocol and look at two examples of a partial redemption and a full redemption:
Example of a partial redemption
Somebody redeems 1,200 ARTH for 60 MAHA and thus repays 1,200 ARTH of your debt, reducing it from 3,200 ARTH to 2,000 ARTH.
In return, 60 MAHA, worth 1,200 $GMU, is transferred from your loan to the redeemer. Your collateral goes down from 200 MAHA to 140 MAHA, while your collateral ratio goes up from 125% to 140% (= 100% * (20 * 140) / 2,000).
Example of a full redemption
Somebody redeems 6,000 ARTH for 300 MAHA. Given that the redeemed amount is larger than your debt minus 5 ARTH (set aside as a Liquidation Reserve), your debt of 3,200 ARTH is entirely cleared and your collateral gets reduced by 3,195 $GMU of MAHA, leaving you with a collateral of 40 MAHA (= 200 - 3,200 / 20).
In both cases, the net value of your position minus the debt remains the same, however during a redemption your exposure to the underlying asset decreases.

Redemption Fees

Under normal operation, the redemption fee is given by the formula (baseRate + 0.5%) * collateral redeemed

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable, which is dynamically updated. The baseRate increases with each redemption, and decays according to time passed since the last fee event - i.e. the last redemption or issuance of ARTH.
Upon each redemption:
  • baseRate is decayed based on time passed since the last fee event
  • baseRate is incremented by an amount proportional to the fraction of the total ARTH supply that was redeemed
  • The redemption fee is given by (baseRate + 0.5%) * ETHdrawn

Stability Fees

For every redemption, the ARTH holder will have to pay a fee which is a percentage of the value being liquidated in MAHA tokens.
This acts as a method to dampen the redemption of bonds which can often create a negative price impact if done all too quickly. The stability fee is not meant to de-incentivize ARTH holders from redeeming their bonds but rather used to control the speed at which they do so.
The stability fee is managed via Governance.

FAQs

Is redemption the same as paying back my debt?

No, redemptions are a completely separate mechanism. All one has to do to pay back their debt is adjust their loan's debt and collateral.

As a borrower, do I lose money if I'm redeemed against?

If your loan is redeemed against, you do not incur a net loss. However, you will lose some of your ETH exposure. Your loan's collateral ratio will also improve after a redemption.

How can I avoid my loan's collateral being redeemed?

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the loans in the system. The riskiest loans (i.e. lowest collateralized loans) are first in line when a redemption takes place.