Redemptions and dCNY Price Stability

This document explores the mechanisms that ensure dCNY closely follows the price of CNY and provides an overview of the redemption process in the ZolTAO ecosystem. It also covers related topics such as redemption fees, base rates, and the impact of redemptions on borrowers.

Price Stability: Hard and Soft Peg Mechanisms

1. Hard peg mechanisms: dCNY maintains a close relationship with the price of CNY through hard peg mechanisms, such as the ability to redeem dCNY for ETH at face value (1 dCNY for ¥1 of ETH) and the minimum collateral ratio of 110%, which create a price floor and ceiling, respectively.

2. Soft peg mechanisms: dCNY also benefits from soft peg mechanisms, such as parity as a Schelling point, and the borrowing fee on new debts. As redemptions increase (implying dCNY is below ¥1), the base rate also rises, making borrowing less attractive and preventing the issuance of new dCNY that could drive the price below ¥1.

Redemptions: Process and Fees

1. Redemption process: A redemption is the process of exchanging dCNY for ETH at face value, as if 1 dCNY is exactly worth ¥1. Users can redeem their dCNY for ETH at any time without limitations.

2. Redemption fees: A redemption fee might be charged on the redeemed amount. The redemption fee is given by the formula (baseRate + 0.5%) * ETH drawn.

Base Rate and Redemption Fee Calculation

1. Base rate calculation: The baseRate is dynamically updated and depends on redemptions and issuances of dCNY. It increases with each redemption and decays according to the time passed since the last fee event.

2. Redemption fee calculation: The redemption fee is determined by the formula (baseRate + 0.5%) * ETH drawn.

Impact of Redemptions on Borrowers

1. Net loss: Borrowers do not incur a net loss if their Trove is redeemed against. However, they will lose some of their ETH exposure, and their Trove's collateral ratio will improve after a redemption.

2. Avoiding redemptions: To minimize the risk of being redeemed against, borrowers should maintain a high collateral ratio relative to other Troves in the system. The riskiest Troves (i.e., those with the lowest collateralization) are first in line when a redemption takes place.

The ZolTAO ecosystem employs hard and soft peg mechanisms to ensure dCNY's close relationship with the price of CNY. The redemption process is an essential part of this system, allowing users to exchange their dCNY for ETH at face value. Understanding the impact of redemptions on borrowers and the various fees involved is crucial for users to make informed decisions within the ZolTAO ecosystem.