Understanding Redemptions in Zero

As Zero has grown, it has also begun to put pressure on various aspects of the Sovryn ecosystem. The result has been more than the usual volume of redemptions. Some users are checking their lines of credit only to discover that they have less RBTC collateral than they put in. Naturally, users are unhappy (to say the least!) when this occurs and are asking questions about redemptions in Zero.

The Sovryn Zero team wants users to be crystal clear on how Zero works. The Sovryn ethos is to be as transparent as possible, and our contributors don’t want any surprises for users. So let’s walk through some of the main questions that are being asked.

No. Redemption is not the same as paying back your loan. Then what is redemption? In a redemption you simply “cash in” the ZUSD (or—soon—DLLR) you hold in exchange for the same value of RBTC at the current market rate. If a redemption occurs against your line of credit, your loan is paid down but is paid out of your collateral.

You don’t have to have a line of credit open to redeem. If you’ve swapped another asset for ZUSD, you can redeem the ZUSD you hold. Redeemers are charged a redemption fee, while paying back a loan is free. The Zero dapp has a specific place for paying back loans.

No. Redemption is not the same as liquidation. A liquidation normally occurs when a line of credit falls below a 110% collateral ratio (CR). (In recovery mode—when the total CR of the system falls below 150%—a line of credit is liquidated when it is the lowest CR in the system and is below 150%.) The collateral is forfeited, and the debt is canceled. Redemptions are not triggered by a particular CR or price movement. A redemption occurs whenever a ZUSD holder chooses to exchange their ZUSD for the equivalent value of RBTC. The RBTC is taken from the lowest-collateralized line(s) of credit—enough lines of credit so that their debt absorbs the redemption—and an equivalent amount of ZUSD debt is canceled.

This is the unwelcome surprise some users have experienced. Unfortunately, there is no specific individual CR that guarantees you won’t be redeemed against. The lowest-collateralized line of credit is subject to redemption no matter how high the CR is. The best defense against redemption is to maintain a CR that is high relative to the other LoCs in the system. The riskiest LoCs are the lowest-collateralized LoCs; these are first in line when a redemption takes place.

As part of the early adoption of Zero, there is an imbalance in supply and demand of ZUSD. More people are minting ZUSD through loans than are buying ZUSD to pay off loans or stash away for savings. More people are wanting to trade away ZUSD for other assets than to buy ZUSD and put it to work (like depositing it in the Zero stability pool). As a result of this imbalance and the relatively few use cases for ZUSD currently, some ZUSD holders have chosen to redeem their ZUSD and shift into RBTC.

This is an understandable question. The answer is that this is the way Zero guarantees that one ZUSD has a price floor of about one USD. Present and future ZUSD holders must have confidence that they can always exchange their ZUSD for the same USD value in bitcoin. Without this guarantee, no one would want to accept your ZUSD for payment or exchange because they would have no guarantee of its value in terms of a valuable collateral asset.

Think of ZUSD as similar to a gold certificate. If someone goes to a bank and deposits gold, they are issued a gold certificate guaranteeing that they can exchange the certificate for the stated amount of gold. If the certificate holder then sells that gold certificate to someone else, the new holder wants to have the assurance that they can go to the bank and redeem it for the stated amount of gold. Zero works similarly but with bitcoin instead of gold.

If your line of credit is redeemed against, you will lose some of your collateral. No one wants to lose RBTC! But it’s not as bad as it sounds. No net value is lost in the line of credit at the moment of the redemption. The exact value that is lost in RBTC is canceled in ZUSD debt.

Sovryn has been considering this change for many months and made the tentative plan public on Discord several weeks ago. Redemptions are a terrible user experience, as some of our users have painfully discovered. Redemption was never intended as a shortcut for trading stablecoins for RBTC. The purpose of redemption is to guarantee the ZUSD-USD peg. This is best handled in an automated, algorithmic fashion that accurately analyzes the peg discrepancy and the costs associated with enforcing it. Thus, we view redemption as expert functionality, and we expect this functionality to eventually be handled by bots rather than through the dapp.After weighing the value of the redemption UI against the growing negative user experience of borrowers, we determined the time had come to remove the UI. Redemptions can be done using direct smart-contract calls. Anyone who is motivated enough to redeem ZUSD this way will likely be motivated enough to calculate the gains and losses of the full process.

Even with BabelFish ZUSD deposits paused and redemptions not as accessible, ZUSD can still be used in four different ways: hodling, p2p trade, stability pool deposits, and repaying line of credit debt. For more details on each of these use cases, see the forum post “A note about Zero redemptions and where we go from here” by light.

Sovryn is rolling out the Sovryn Dollar (DLLR) shortly. We are putting a strong promotion effort behind it to announce DLLR to the world. Our message is that this decentralized, bitcoin-backed stablecoin is the stablecoin of choice in an environment in which centralized stablecoins are increasingly under suspicion of not being fully collateralized and are under scrutiny  by regulators. DLLR will incorporate ZUSD and drive demand for it.

Sovryn will also launch a DLLR/RBTC trading pair to put DLLR to work.

Sovryn Financial is being launched to further facilitate the adoption of DLLR as an asset for payments so it becomes desirable to hold as a stable, everyday-use currency.

Overcoming these growing pains requires a little time and patience, resulting in robust and seamless Zero and DLLR functionality.

If you want to understand Zero’s redemption mechanism in more detail, we recommend that you read through Zero: Protocol for Zero-Interest Loans on our wiki. 

For a detailed explanation of the redemption mechanism, the current ZUSD market dynamic, and the decision to remove redemptions from the Zero UI, see the above mentioned forum post “A note about Zero redemptions and where we go from here”.

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Stay Sovryn!