Redemptions

Redemptions act as the second line of defense for maintaining NECT’s peg. When NECT trades below $1, the protocol allows users to redeem NECT for a pro-rata share of collateral.

Redemptions form a pivotal aspect of Beraborrow's operations, allowing users to convert $NECT into Collateral at an exact dollar equivalent value.

• Process: The redemption mechanism is straightforward. For an x amount of $NECT, users receive an x dollar worth of Collateral in return.

• Fee Structure: The redemption process includes an algorithmic fee, calculated as per the formula: For the sake of simplicity, we will use $iBGT in this example but the process is the same for all collateral assets.

$$\text{Redemption Fee} = (\text{baseRate} + 0.5\%) \times \text{Amount of iBGT drawn}$$

E.g. with a 1% redemption fee and $iBGT valued at $500, redeeming 100 $NECT would result in receiving 0.198 iBGT (0.2 iBGT - 0.002 iBGT as the redemption fee).

• Impact on Base Rate: Significant redemption transactions affect the base rate, influencing future redemption fees.

The baseRate is a dynamic variable that increments with each redemption and decays towards zero over a 24-hour half-life. The formula for the baseRate adjustment upon redemption is:

$$\text{baseRate}_{ \text{New}} = \text{baseRate}_{\text{Old}} + \left( \frac{\text{redeemedNect}}{2 \times \text{total NECT}} \right)$$

Impact On Base Rate Over Time With no Redemptions

Borrower’s Technical Perspective on Redemptions

• Impact on Borrowers: In the event of a redemption against a borrower's Den, there's no net monetary loss. However, the $iBGT exposure of the borrower decreases while the collateral ratio of the Den improves.

• Avoiding Redemption: To minimise the risk of their Dens being chosen for redemption, borrowers should maintain a high collateral ratio. Dens with lower collateral ratios are the first to be targeted in redemption events, as redemptions take place against the Dens with the lowest collateral ratio.