Price Stability and Redemptions

Redemptions and DCHF Price Stability

How does DCHF closely follow the price of CHF (Swiss Franc)?

The ability to redeem DCHF for ETH or wBTC at face value (i.e. 1 DCHF for 1 Swiss Franc of ETH/wBTC) 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.

DCHF also benefits from less direct mechanisms for CHF parity — called "soft peg mechanisms". One of these mechanisms is parity as a Schelling point. Since the DeFi Franc treats DCHF as being equal to CHF, 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 DCHF is below CHF 1), so too does the baseRate — making borrowing less attractive, which keeps new DCHF from hitting the market and driving the price below CHF 1.

What are redemptions?

A redemption is the process of exchanging DCHF for ETH or wBTC at face value, as if 1 DCHF is exactly worth 1 Swiss Franc. That is, for x DCHF you get x Swiss Francs worth of ETH or wBTC in return.

Users can redeem their DCHF for ETH or wBTC at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

For example, if the current redemption fee is 1%, the price of ETH is 500 Swiss Francs and you redeem 100 DCHF, you would get 0.198 ETH (0.2 ETH minus a redemption fee of 0.002 ETH).

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 Position's debt and collateral.

How is the redemption fee calculated?

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

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 DCHF.

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 DCHF supply that was redeemed

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

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

If your Position is redeemed against, you do not incur a net loss. However, you will lose some of your ETH exposure. Your Position'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 Position's in the system. Remember: The riskiest Positions (i.e. lowest collateralized Positions) are first in line when a redemption takes place.