Redemptions and the peg

USDL is not a claim on dollars in a bank. It is a claim on the collateral locked in vaults. Any holder, borrower or not, can redeem it with the system: x USDL comes back as x dollars of ETH on Base, or of PLS on PulseChain, minus the redemption fee. The USDL is burned. The debt of the vaults that supplied the collateral is cancelled by the same amount.

Who loses the collateral

The redeemer does not pick a vault. The system walks the sorted list from the lowest collateral ratio upward. A redemption can fully clear several vaults and partially reduce one more, which is reinserted into the list with less collateral and less debt, at a higher ratio. A full redemption zeroes the debt, cancels the 200 USDL liquidation reserve back to the borrower, and sends the leftover collateral to the surplus pool for the borrower to claim later. The vault then closes.

The docs’ partial example, with ETH at $3,788: a vault holds 1.06 ETH against 3,200 USDL, a ratio of 125%, and it is the lowest in the system. Someone redeems 1,200 USDL. That is 0.32 ETH. The vault’s debt falls to 2,000 USDL, its collateral falls to 0.74 ETH, and its ratio rises to 140%. The borrower lost ETH exposure and did not take a net dollar loss on that slice, because the debt fell by the same dollar amount. A full redemption large enough to clear the debt above the 200 USDL reserve closes the vault.

Debt In Front is the sum of USDL debt in every vault with a worse ratio than yours. It is the buffer between you and the next redemption. Raising your own ratio is how you move back in the line. You cannot stop redemptions as a class. You can only avoid being the cheapest vault in the list.

The fee

Under normal operation the redemption fee is (baseRate + 0.5%) × collateral drawn. Each redemption decays the base rate for the time since the last fee event, then increases it in proportion to the fraction of the USDL supply that was just redeemed. The same base rate feeds the borrowing fee, so a wave of redemptions makes the next mint more expensive, up to the 5% cap. The 0.5% floor is there so arbitrage cannot redeem in front of every oracle update for nothing. In Recovery Mode the borrowing fee goes to zero. The redemption fee does not.

Redemptions are blocked when the system collateral ratio is under 110%. The docs also say they are turned off for the first 14 days after deployment.

Why this is the peg

If USDL trades below a dollar of collateral, buying it and redeeming it is a profit, and that buying is the floor. The 110% minimum is the other side: minting new USDL against too little collateral is what the ratio forbids, which is the ceiling. A softer pressure sits next to those two. After redemptions the borrow fee rises, so less new USDL is issued into a weak market. The market can still trade USDL away from a dollar. The redemption is what makes that trade an opportunity rather than a break. Repaying your own vault is not this trade. It does not touch anyone else’s collateral, and it does not pay the redemption fee.