Understanding Redemptions on Unbound V2
Unbound is a decentralized, permissionless, cross-chain protocol that creates capital efficiency by allowing liquidity providers on various decentralized exchanges (DEXs) to use their liquidity provider tokens (LPTs) as collateral to mint UND, our USD-pegged stablecoin.
The primary characteristic of a stablecoin is to, quite obviously, maintain a stable value denominated in USD (in our case). Maintaining this stable peg is easier said than done. While Unbound V2 is designed in such a way as always to be over-collateralized, the exact market price of stablecoins can also experience volatility during periods of market turmoil. To address this issue, in Unbound V2, we have introduced redemptions.
What are redemptions?
In Unbound V2, redemptions serve as a mechanism for price stability. Through the redemption process, users can exchange their UND for an equivalent value of the underlying collateral. The protocol will always value UND at $1, irrespective of the price in the market. Therefore, if a user burns U amount of UND, they will receive collateral (LPTs) worth U dollars (minus the redemption fee). For example, assume the redemption fee is currently 2%, and the price of the underlying X LPT is $10. If a redeemer deposits 100 UND, they will receive 9.8 X tokens (98% of 100/10).
Redemptions ensure the market price never falls too far below $1. This mechanism utilizes free market dynamics to ensure the price. “How?“ If the market price of UND falls below $1, say $0.95, then a redeemer can buy UND from the open market to redeem collateral worth $1 (minus fees). They can then sell this collateral for $1 and make a profit. So, if the effective buying price of UND were $0.95 and the redeemer received $0.98 worth of collateral, they would make a profit of $0.03 for every UND that was redeemed. As more and more UND gets redeemed, its supply in the open market reduces, bringing its price back up.
The redeemed collateral will come from the trove of the depositor, who has the lowest collateralization ratio (CR). Unlike a liquidation event, redemption does not cause any financial loss for this trove. The value of the collateral the trove forgoes equals the amount of debt (in UND) repaid. The process also increases the CR ratio of this trove, making their position healthier.
We expect redemptions to be rare events with small ticket sizes. The $1 market value is the focal point for this system. Minor deviations in the market prices will trigger enough redemptions to bring the price back up before we start seeing any significant volatility in the price of UND. A stable market price will make UND a valuable token for retail users to hold during market volatility while also allowing borrowers to increase their capital efficiency and leverage their liquidity positions.
About Unbound Finance
Unbound Finance is a novel, non-custodial lending platform driven towards enabling newer and better opportunities of yield with a view to improving the overall capital efficiency of the DeFi ecosystem. The platform enables DeFi users to borrow over-collateralized synthetic asset loans in the form of UND stablecoin by collateralizing liquidity pool tokens (LP tokens) and concentrated liquidity positions of next-gen AMMs such as Uniswap v3. Through synthetic assets like UND stablecoin, Unbound aims to unlock the liquidity available in DeFi DEXs and to enable the easy flow of this liquidity from one chain to another without actually removing it.
The key highlights of the protocol are as follows:
- Interest-free borrowing: Unbound does not charge any interest on the borrowed UND.
- Perpetual borrowing: At Unbound, borrowers have unlimited maturities. Users can unlock the underlying collateral at any time by simply paying off the outstanding debt.
- Stablecoin UND: UND is the first flagship product of the Unbound protocol. It is a decentralized, cross-chain stablecoin designed to be native to the AMM space.
- Factory Smart Contracts: Unbound uses liquidity lock contracts that are permissionless and support EVM-based AMMs like Uniswap, Curve, Trader Joe, SushiSwap and the like.
- Collateralizing concentrated liquidity positions: Unbound is one of the first protocols to use concentrated liquidity positions as collateral for borrowing synthetic crypto assets such as UND stablecoin.