💰Minting / Redeeming USDEFI
Explore the mechanics of minting and burning (redeeming) USDEFI in the DCNTRL Protocol. Understand how BNB-backed USDEFI is created and removed from circulation, ensuring stability & peg.
Last updated
Explore the mechanics of minting and burning (redeeming) USDEFI in the DCNTRL Protocol. Understand how BNB-backed USDEFI is created and removed from circulation, ensuring stability & peg.
Last updated
USDEFI, the stablecoin at the core of the DCNTRL Protocol, is minted and burned through a process that ensures its stability and peg to the US dollar. This page delves into the details of how USDEFI is minted and burned (or redeemed), and how these processes contribute to the overall functionality and stability of the DCNTRL Protocol.
Minting is the process of creating new USDEFI tokens. In the DCNTRL Protocol, USDEFI is minted when a user deposits Binance Coin (BNB) as collateral to draw a 0% loan.
The amount of USDEFI minted is determined by the amount of BNB deposited and the collateralization ratio, which is set at a minimum of 110%. This means that for every $1.00 worth of BNB deposited, a maximum of $0.90 in USDEFI can be minted.
The minted USDEFI is then disbursed to the borrower, who can use it within the DCNTRL ecosystem or in the wider Binance Smart Chain network. The BNB deposited as collateral remains locked in the protocol until the borrower repays the loan, at which point the corresponding USDEFI is burned and the BNB is returned to the borrower.
The benefit of using DCNTRL is that when you supply BNB as collateral to borrow USDEFI, you'll always high loan-to-value ratio and 0% interest rate. This allows you to leverage your BNB holdings while keeping your USDEFI for further investment or liquidity needs. This unique feature of DCNTRL Protocol provides borrowers with a clear and predictable borrowing experience, free from fluctuating interest rates.
Burning, or redeeming, is the process of removing USDEFI tokens from circulation. In the DCNTRL Protocol, USDEFI is burned when a borrower repays their loan or when a user redeems USDEFI for BNB.
When a borrower repays their loan, they return the borrowed USDEFI to the protocol. This USDEFI is then burned, effectively removing it from circulation and maintaining stability. The corresponding BNB collateral is then unlocked and returned to the borrower.
Users can also redeem USDEFI for BNB at face value at any time. When a user redeems USDEFI, they return it to the protocol, where it is burned. The protocol then returns an equivalent value of BNB (at the current market price) to the user. This redemption process provides a mechanism for maintaining the peg of USDEFI to the US dollar, as it allows users to exchange USDEFI for BNB at its face value, regardless of market conditions.
In addition to the standard redemption process, DCNTRL Protocol incorporates an arbitrage mechanism that allows users to exchange USDEFI for BNB. This is a protocol-level game that utilizes the liquidity available in users' loan positions.
When a redemption occurs, the protocol starts by using the liquidity of the least collateralized loan position in the DCNTRL ecosystem and moves up as needed. This ensures that the system remains stable and that USDEFI maintains its peg to the US dollar.
Being the least collateralized loan position in DCNTRL is not an ideal situation, as your BNB collateral is at risk of being used for redemptions. If this happens, you will lose some BNB, but your debt will also proportionally decrease, corresponding to the USDEFI redeemed.
This mechanism encourages users to maintain reasonable collateralization ratios, even when the system is not in recovery mode. It serves as a self-regulating mechanism whose exact threshold depends on the average risk appetite of the other participants. This adds another layer of stability to the DCNTRL Protocol, making it a very elegant design.
DCNTRL Protocol users can redeem USDEFI for BNB at face value, usually when the USDEFI price is below $1. Doing so helps to stabilize the USDEFI value and maintain its peg to the US dollar. This direct arbitrage mechanism ensures that USDEFI maintains a close parity with the USD, contributing to the stability and reliability of the DCNTRL Protocol.
The processes of minting and burning (or redeeming) USDEFI are integral to the operation and stability of the DCNTRL Protocol. By creating and removing USDEFI in response to user actions, the protocol ensures that the supply of USDEFI is always backed by a sufficient amount of BNB collateral. This, in turn, maintains the stability of USDEFI and its peg to the US dollar, providing a reliable and stable asset for users of the DCNTRL Protocol.
