💰Redemptions and PUST Price Stability

Palm Finance utilizes Liquity’s unique economic incentives to create a robust and scalable stablecoin.

How does PUST closely follow the price of USD?

The ability to redeem PUST for collateral at face value (i.e. 1 PUST for $1 of collateral) and to mint PUST at a 103% against USDC create a price floor and price ceiling (respectively) through arbitrage opportunities. We call these "hard peg mechanisms" since they are based on direct processes.

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

What are redemptions?

A redemption is the process of exchanging PUST for collateral at face value, as if 1 PUST is exactly worth $1. That is, for x PUST you get x Dollars worth of collateral in return.Users can redeem their PUST for collateral at any time without limitations. However, a redemption fee is charged.

For example, if the current redemption fee is 1%, the price of collateralTokenA is $500 and you redeem 100 PUST, you would get 0.2 collateralTokenA and pay a redemption fee of 1 PUST (1% of redeemed amount).The larger the redemption amount, the larger the redemption fee.

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 Asset portfolio's in the system. Remember: the riskiest Asset portfolios (i.e. lowest collateralized Asset portfolios) are first in line when a redemption takes place.

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 Asset portfolio's debt and collateral.

How do you prevent the Curve pool become imbalanced when many people lever up with PUST?

When there is a lot of demand for leverage, this causes a lot of PUST to be minted and enter the market. For many new stablecoin projects, the stablecoin mostly ends up in one place-the Curve LP-because that is the only place where there are incentives for the stablecoin to sit.In our case the redemption mechanism prevents the PUST price from getting out of whack by effectively creating a profitable reason for arbitragers to take it off the market when its price is below $1. Additionally, since Palm offers incentives for users to deposit PUST in our stability pool, we at least have one native source of demand for PUST at launch, so high levered borrowing volume has less of an impact in terms of causing a Curve pool imbalance.

How is the redemption fee calculated?

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

How is the baseRate calculated?

Redemption fees are based on the baseRate state variable in Palm Finance, 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 PUST.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 PUST supply that was redeemed

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

How can I calculate the redemption fee as an arbitrageur?

The fee is paid in PUST. The PUST needed to cover the redemption amount and the fee can be calculated using this formula. The PUST balance needed is represented byZ Zto perform a redemption amount of Y

​​​

whereZ = Y + XZ=Y+X​and

• ​BR = BR=decayed Base Rate

• ​\beta = β=2

• ​S = S=Total PUST Supply

• ​Z = Z=Redeemer balance of PUST

• ​X = X=PUST Fee

• ​Y = Y=Intended redemption amount

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

If your Asset portfolio is redeemed against, you do not incur a net loss. However, you will lose some of your collateral exposure. Your Asset portfolio's collateral ratio will also improve after a redemption. To compensate for this change, we will be giving 20% of the redemption fee back to the user who is redeemed against.What about staked ibTKN rewards that the Asset portfolio owner has accumulated, but not redeemed? Palm will unstake the ibTKNs properly so that the Asset portfolio owner will receive the interest rewards, and the ibTKNs will be then given to the redeemer. Since base ibTKN rewards are accounted for in the price, the Asset portfolio owner is not incurring any loss due to this property.

Secondary Redemption Mechanism

We also have a secondary redemption mechanism, which is intended to make it easier to arbitrage PUST which raises the effectively PUST price floor. The secondary mechanism allows you to choose a specific collateral from the bottom Asset portfolio in the sorted Asset portfolios array and only redeem against that. So if that bottom Asset portfolio is collateralized by USDC + WETH, you could choose to do a partial redemption and redeem PUST for just the USDC in the Asset portfolio. After completing this redemption, the Asset portfolio will likely no longer be the bottom Asset portfolio in the system and then you can do the same thing to another Asset portfolio. The redeemer can only perform this on one Asset portfolio, and one collateral at a time. This will make it easier to arb the peg if PUST trades below $1 due versus being forced to arbitrage against multiple types of assets.