Redeeming against a vault

To keep USDN pegged at $1, Neptune offers a redemption mechanism where any user may redeem their USDN for the equivalent value in ETH, tETH, SOL, ezSOL, TIA, jitoSOL or stTIA . Users must open different vaults per collateral type. These collaterals will be taken from the user’s vault with the lowest collateral ratio; after a fee is assessed, the vault owner's debt is repaid at a premium. While this may not be an optimal experience for vault owners, they end up with a better collateral ratio which leaves their vault in a healthier state.

Here is the redemptions page: https://neptuneprotocol.xyz/redeem

Redemptions are only made available to ensure USDN has a price floor and only will be profitable when USDN is trading below $1. There is also a fee for redemptions so that they don’t happen too frequently, which would degrade the user experience.

Redemption Fee

The redemption fee is a protocol mechanism to ensure that redemption doesn’t happen too frequently, which would degrade the user experience.

The fee charged is the sum of four components:

1. A base fee of 0.5%

2. The amount of USDN redeemed compared to the vault type's circulation.

This fee is equal to 0.5 * m/n where m is the amount of USDN redeemed and n is the total amount of USDN in the respective vault type. The goal is to incentivize the correct percentage of redemption in the system. For example, if USDN is trading at $0.98, at most ($1 − $0.98), or 2%, of the total supply needs to be redeemed to get back to peg. Redeeming any extra amount will not be profitable.

That is, if 100 USDN is redeemed and there is a total of 1000 USDN in circulation, the fee is equal to 0.5 * 100/1000 = 0.05.

3. The fee charged during the last redemption in the system, which decays over time

This is calculated as 0.9^days * lastFee. Here, days is the amount of time since the last redemption. lastFee only includes the USDN supply-based fee component and time-based fee component for the last fee charged in the system, and does not include the vault collateral ratio fee component. The initial value of lastFee is zero. This fee component has the following effect: If USDN has recently been redeemed, there is an incentive not to do another redemption in the near future.

4. The collateral ratio of the redeemed vault

Only the vault with the lowest collateral ratio can be redeemed against for any given vault type. However, since there are multiple collateral types (e.g. SOL and TIA) each with separate types of vaults; the vault with the lowest ratio per collateral type can be redeemed against. Redeeming against a vault with a higher collateral ratio (i.e. a vault in better standing) leads to a higher fee. Therefore, this fee incentivizes users to redeem against the most under-collateralized vault across all vault types and, in turn, for vault users to maintain healthy collateral ratios.