# Redemptions

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:

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

<figure><img src="/files/3vpCZiXTtzkmqy4ZP4x3" alt=""><figcaption><p>Impact On Base Rate Over Time With no Redemptions</p></figcaption></figure>

## **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.


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