Redemptions and HCHF Price Stability

Introduction to Redemptions

Redemptions are a unique feature of the HLiquity protocol. They allow any holder of HCHF to exchange their tokens for HBAR at face value, effectively ensuring the stability of HCHF. This mechanism is crucial in maintaining the peg of HCHF to the Swiss Franc.

How Redemptions Work

When a user initiates a redemption, they specify the amount of HCHF they wish to redeem. The protocol selects the Trove with the lowest collateral ratio and uses its collateral to fulfill the redemption. The redeemed HCHF is burned, and the corresponding amount of HBAR is transferred to the redeemer.

Impact on Troves

Redemption directly impacts Troves with the lowest collateral ratios. When a redemption occurs, the debt of the affected Trove decreases, and an equivalent amount of its collateral is claimed. This process continues until the entire redemption request is filled.

HCHF Price Stability

The redemption mechanism plays a crucial role in maintaining the stability of the HCHF price. If the market price of HCHF drops below its peg, users can buy HCHF cheaply on the market and redeem it for HBAR at face value, making a profit. This arbitrage opportunity incentivizes market participants to restore the peg.

Redemption Fee

A redemption fee is applied to each redemption to compensate for the risk taken by the Trove owners. The fee is dynamic and depends on the amount of HCHF being redeemed relative to the total HCHF supply. The fee is added to the redeemed HCHF and is paid in HBAR.

Conclusion

The redemption mechanism is a powerful tool that ensures the stability of the HCHF peg. By understanding how redemptions work and their impact on Troves, users can make informed decisions and effectively manage their interaction with the HLiquity protocol.