What happens if my vault gets redeemed against?
Can I get Rekt?
The short answer is no, and it can even protect you.
It’s a bit complicated, but I will explain it simply.
But where does the PLS come from?
It comes from the lowest collateralized vault(s).
For example, let's say there are three vaults at 110.5% collateral ratio:
If a user redeems 300,000 USDL, they will perform a full redemption on Vaults 1 and 2, and a partial redemption on Vault 3.
Effectively, a user has burned 300,000 USDL coins, canceled out 300,000 USDL worth of debt, and received 300,000 USD worth of PLS.
A user can only redeem a value of PLS which is equal to the debt of that individual vault, NOT equal to the value of the PLS in the vault.
For example, if Vault 1 has 110,000 PLS, and they minted 90,000 USDL, the redeemer can only get 90,000 USD worth of PLS out of that vault.
If they do cancel the full debt, then the vault closes and the extra 20,000 USD worth of PLS goes to the Collateral Surplus Pool, where it awaits collection.
This makes redemptions different from liquidations because:
When considering the implications of a redeemed-against vault, you have to consider whether it was a full redemption or a partial redemption.
In a full redemption, it’s basically like another user decides to pay back the debt and close your vault for you.
There is no instant loss in value, like in a liquidation, it’s basically breaking even and losing some price exposure to PLS.
There is also a way to frame getting redeemed against as a good thing.
For example, if your vault undergoes a full redemption at 110.5% collateral ratio, you will have saved that top 10.5% if the price dipped a minute later so that your vault is below 110%.
In a partial redemption, it’s essentially like another user decides to alleviate your collateral ratio and repay your debt.
As a result you will lose some price exposure to PLS, but you will not have an instant loss in value.
For example, if you have 110,500 USD worth of PLS and a debt of 100,000 USDL, you have a collateral ratio of 110.5%.
Now let’s say a user redeems 50,000 USDL against your vault in a partial redemption.
Now you have a vault with 60,500 USD worth of PLS with a debt of 50,000 USDL which creates a collateral ratio of 121%.
Because of the redemption, you have alleviated your dangerously close collateral ratio and decreased your price exposure to PLS.
But remember, you still have the 100,000 USDL that you originally minted, assuming you never lost it.
If you want to return to your original collateralized position, you can buy an 50,000 USD worth of PLS off the market with 50,000 USDL and re-collateralize it.
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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.
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