Redemptions Deep Dive

Deep dive on redemptions — why they defend the USDHN peg and how they change a borrower’s Trove

This page explains redemptions at a deeper level: why they help peg defense and what they do to borrowers.

Not investment advice — Redemption is a protocol mechanism, not a guarantee. This page is educational.

At a glance

• A redemption burns USDHN and returns collateral under protocol rules.

• Redemptions create an on-chain pathway that can reduce USDHN supply when it trades weak.

• Borrowers can be affected because redemptions may remove part of a Trove’s collateral while also reducing its debt.

• The redemption ordering is defined in deployed contract code (immutable per deployment). Fees and outcomes can vary with parameters and market conditions.

What redemption does (mechanically)

A redemption is an on-chain action that, under protocol rules:

1. burns a specified amount of USDHN, and

2. returns collateral value close to that amount (minus fees), using protocol pricing.

This matters because it directly reduces USDHN supply.

Why this can defend the peg (without hand-waving)

If USDHN trades below $1 in the market:

• a user can buy USDHN at a discount (e.g., $0.98)

• redeem it through the protocol for collateral valued closer to $1 per USDHN (minus fees)

This is an economic incentive:

• it increases demand for USDHN when it is cheap, and

• it reduces supply by burning redeemed USDHN

Both effects can push the market price upward, though fees and market constraints can limit how quickly it works.

Borrower impact — three scenarios (with CR math)

Simplified math — Exact deltas depend on fee rules and protocol pricing. The scenarios below are “directionally correct” and use round numbers.

Why CR often improves under redemption (one-line intuition)

If a redemption removes the same USD value r from collateral value V and debt value D (ignoring fees):

$$CR' = \frac{V - r}{D - r}$$

When CR = V/D > 1, then CR' > CR. Borrowers often see “less debt + less collateral” and a higher CR.

Scenario 1 — one redemption: higher CR, smaller position

Assume a Trove starts with:

• collateral value V = $200

• debt D = 100 USDHN → CR = 200 / 100 = 200%

Now suppose 20 USDHN is redeemed against this Trove (simplified, ignoring fees):

• new debt: D' = 80 USDHN

• collateral value removed: about $20

• new collateral value: V' = $180

New CR:

$$CR' = \frac{180}{80} = 225\%$$

Interpretation:

• more buffer (higher CR)

• less exposure (smaller collateral position)

Scenario 2 — redemption helps, but you can “undo it” by borrowing more

Continue from Scenario 1 (after redemption): V = $180, D = 80 (CR 225%).

If you mint an additional 40 USDHN later (no collateral change):

• V stays 180

• D becomes 120

Then:

$$CR = \frac{180}{120} = 150\%$$

Practical takeaway: redemptions can improve safety in the moment, but your future borrowing choices can bring you back toward liquidation risk.

Scenario 3 — redemption improves CR, but price risk still dominates

Continue from Scenario 1 (after redemption): V = $180, D = 80 (CR 225%).

If collateral value drops by 40% afterward (price move):

• V becomes 180 × 0.6 = $108

• D stays 80

Then:

$$CR = \frac{108}{80} = 135\%$$

If your collateral branch MCR is above 135%, the Trove can still become unsafe even after a redemption. Redemption is not a substitute for a CR buffer.

Which Troves get redeemed (conceptual)

Protocols need a deterministic way to choose “where redeemed debt comes from.”

Many designs use an ordering that:

• prioritizes positions based on a borrower-selected parameter (often a rate/priority setting), and

• is easy to reason about for users and integrators

Hann Finance’s redemption ordering is defined in the deployed contracts and is immutable for a given deployment. Use the official UI to confirm you are interacting with the correct deployed contracts and to view current parameters.

Practical ways to manage redemption impact (borrowers)

• Do not run with a minimal CR buffer.

• If advanced rate/strategy features exist in your branch, understand how they interact with redemption selection.

• Plan for the fact that redemptions can change your position size even if they improve CR.

Next reads

• Main overview: Redemptions & Risk

• Borrower safety basics: Borrowing & Liquidation

• Full risk framing: Risk Disclosure