Redemptions and HEXDC Price Stability

How does HEXDC closely follow the price of USD?

The ability to redeem HEXDC for HEX at face value (i.e. 1 HEXDC for $1 of HEX) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.

HEXDC also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since Flex Protocol treats HEXDC as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying HEXDC is below $1), so too does the baseRate — making borrowing less attractive which keeps new HEXDC from hitting the market and driving the price below $1.

What are redemptions?

A redemption is the process of exchanging HEXDC for HEX at face value, as if 1 HEXDC is exactly worth $1. That is, for x HEXDC you get x Dollars worth of HEX in return.

Users can redeem their HEXDC for HEX at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

Note that the redeemed amount is taken into account for calculating the base rate and might have an impact on the redemption fee, especially if the amount is large.

Is a 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 Vault's debt and collateral.

How is the redemption fee calculated?

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

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable in Flex Protocol, 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 HEXDC.

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 HEXDC supply that was redeemed

  • The redemption fee is given by (baseRate + 0.5%) * HEXdrawn

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

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

How can I avoid being redeemed against?

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

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