QuiD Protocol
Credit Redemption
Burn Stablecoins in Exchange for Crypto
The definition of a “crypto-dollar” is a monetary primitive that serves as a fungible unit of account whose holder is guaranteed to be able to sell back to its issuer for a dollar's worth of units backing it. Hence, “sale” of QD to the protocol itself (as opposed to via open markets, i.e. external venues like Bancor/Binance) for its face value in crypto collateral is distinctly referred to as redemption.
Engaging the leveraged long loop (as described in Credit Creation) will increase the circulating supply of QD (thus pushing its price back down to $1). Engaging the leveraged short loop will push its price up as more QD is withdrawn from open markets and collateralised to borrow more crypto against. These two forces will continuously push and pull each other until collateral prices recover.
Redemptions are a very useful mechanism for restoring QD’s peg when it’s trading on open markets for slightly below $1 as a result of crypto prices recovering, inducing Debtors to engage the leveraged long loop and increase their crypto upside exposure.QD bought for less than a dollar on open markets will be worth more when redeemed for collateral through the protocol, as the protocol will always buy 1 QD for exactly $1.
Exploiting this arbitrage opportunity will reduce the circulating supply of QD, thus helping push its price on open markets back up to $1. Redemptions offer an opt-in deferred payout scheme to incentivise quicker peg recovery: redeemers may slowly receive more collateral’s worth than the face value of their paid-in QD, in exchange for accepting less collateral upfront while the protocol gets to benefit immediately from burning the entire redeemed amount to clear its liabilities (defaulted Pledges’ debts). Redemption is facilitated by aggregating the debt and collateral repossessed from defaulted Debtors into a “Dead Pool”, where these assets and liabilities sit awaiting absorption by Creditors pro rata to their solvency contributions (see Credit Protection). Meanwhile, the QD being redeemed is annihilated by using it to pay off an equivalent quantity of defaulted debt. To account for this reduction in liabilities, an equal and opposite reduction in assets depletes the collateral in the Dead Pool, sending the deducted amount to the redeemer. If the amount is larger than what the Dead Pool can cover, the operation spills over into active Pledges, consuming them in reverse order of collateralisation. As a corollary, this will directly increase the total collateralisation of the protocol.
Are we worried Creditors will time the withdrawal of their deposits to occur right after periods of a high volume of redemptions, minimizing the amount of Dead Pool debt shares they must absorb? Such periods are exactly times when Creditors can make the most money with the least amount of risk: crypto is probably rising, so why not keep earning premiums on top of that?
Last modified 3mo ago
Copy link