# Redemptions & Risk

This page explains **redemption** (USDHN → collateral via the protocol), why it exists, and what it means for borrowers and USDHN holders.

{% hint style="info" %}
**Not investment advice** — Redemption and liquidation are protocol mechanisms, not guarantees. You can lose funds.
{% endhint %}

## At a glance

* Redemption is a **peg-defense** mechanism: USDHN can be swapped back into collateral through the protocol.
* Redemptions can reduce USDHN supply when the market is weak.
* Borrowers may be **partially redeemed** depending on protocol rules.
* Understanding redemptions helps you manage both **peg risk** and **borrower risk**.

## Redemption in one diagram

<figure><img src="https://758864285-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F6shl07RLB1YEOikuiffi%2Fuploads%2FDMalJMPrSbRcyXok6F3G%2Fredemption1_en.png?alt=media&#x26;token=9f61163a-c2e0-41d0-bea3-eb688e15f628" alt=""><figcaption></figcaption></figure>

{% @mermaid/diagram content="flowchart LR
A\[USDHN holder] -->|Redeem USDHN| P\[Protocol redemption]
P -->|Burn USDHN| B\[USDHN supply down]
P -->|Return collateral, minus fees| C\[Collateral to redeemer]

style A fill:#B0BBF4,color:#333,stroke:#4C5FD5,stroke-width:2px
style P fill:#4C5FD5,color:#fff,stroke:#3A49C5,stroke-width:2px
style B fill:#EEFBA0,color:#333,stroke:#D1F24A,stroke-width:2px
style C fill:#D1F24A,color:#333,stroke:#B8DA2C,stroke-width:2px" %}

## What is redemption?

Redemption is an on-chain action that:

1. burns a specified amount of USDHN, and
2. returns collateral value close to the redeemed amount (minus fees), according to protocol rules.

In many CDP systems, redemption creates an arbitrage pathway: if USDHN trades below $1, users may buy USDHN at a discount and redeem it for collateral valued closer to $1 (minus fees).

## Who should care?

{% tabs %}
{% tab title="If you hold USDHN" %}
Redemption is one reason USDHN can trend back toward $1 under normal conditions.

However, redemption may include fees, execution constraints, and market friction.
{% endtab %}

{% tab title="If you are a borrower" %}
Your Trove can be affected by redemptions, depending on how the protocol prioritizes which debt is redeemed.

Practical outcome:

* some of your debt may be repaid (good for safety)
* but some collateral may be removed (changes your exposure)

If you borrow, you should understand redemption risk, especially when using advanced rate/strategy features.
{% endtab %}
{% endtabs %}

## How are Troves selected for redemption?

{% hint style="warning" %}
**Conceptual explanation** — The selection ordering is defined in the deployed on-chain contract code and is **immutable for a given deployment**. This section describes the general intent and user-facing implications.
{% endhint %}

Most designs prioritize redemptions in a way that:

* targets positions contributing least to market demand (often linked to interest settings), and
* avoids complexity for users.

{% hint style="warning" %}
**\[TBD] Exact ordering rules and parameters** — Document the exact contract function and ordering criteria once the deployment configuration is finalized.
{% endhint %}

## What can you do to reduce redemption risk?

* Avoid running Troves at the edge of liquidation safety.
* If the system supports rate delegation or manager policies, use them to keep your rate aligned with market conditions.
* Understand that extreme market stress can trigger unusual behavior across both redemptions and liquidations.

## Manual redemption (advanced)

Manual redemption is an advanced action. Contract addresses and UI entrypoints depend on the deployed network.

{% stepper %}
{% step %}

#### Step 1: Verify contracts

Use only official addresses (official UI, GitBook updates, or verified explorers).

{% hint style="danger" %}
Never approve tokens to unverified contracts. Phishing is common in DeFi.
{% endhint %}
{% endstep %}

{% step %}

#### Step 2: Approve USDHN

Approve the redemption contract/router to spend your USDHN.

{% hint style="warning" %}
**\[TBD] Function signatures** — The exact function names and parameters should match the deployed contracts and ABI.
{% endhint %}
{% endstep %}

{% step %}

#### Step 3: Submit the redemption

Send the transaction with your amount and fee constraints (if supported). After success, you receive collateral to your wallet.
{% endstep %}
{% endstepper %}

## Deep dives (optional)

* Redemption mechanics (with CR examples): [Redemptions Deep Dive](https://hann-finance.gitbook.io/hann-finance/resources/deep-dives/redemptions)

## Next reads

* Borrowing safety basics: [Borrowing & Liquidation](https://hann-finance.gitbook.io/hann-finance/protocol/borrowing-and-liquidation)
* StableSwap and liquidity: [StableSwap DEX](https://hann-finance.gitbook.io/hann-finance/protocol/stableswap-dex)
* Full risk list: [Risk Disclosure](https://hann-finance.gitbook.io/hann-finance/risks/risk-disclosure)