Redemptions

A starUSD holder can permissionlessly redeem 1 starUSD for 1 USD worth of collateral from the protocol. At launch, redemptions route to the XLM branch.

Redemptions are processed against the lowest-interest Troves first.

Flow

1. The redeemer sends starUSD to the protocol.
2. The system traverses Troves from lowest rate upward.
3. Trove debt is reduced to match the redeemed amount.
4. The redeemer receives XLM collateral equivalent to the value redeemed, minus the redemption fee.
5. The redeemed starUSD is burned.

Borrower Impact

Redemptions reduce a borrower's debt and collateral exposure proportionally. They are not designed as borrower losses, but they reduce the borrower's XLM exposure and close part of the position.

This creates the incentive not to set rates too low. A borrower who underpays relative to the market accepts a higher chance of being redeemed.

Peg Role

When starUSD trades below 1 USD, arbitrageurs can buy discounted starUSD and redeem it for 1 USD worth of collateral. This creates buy pressure, reduces circulating supply, and helps push starUSD back toward parity.

Redemptions also raise the system's average interest rate by repaying the lowest-rate Troves first. If starUSD is oversupplied because borrow rates are too low, redemptions reduce supply and throttle low-rate minting.

Bounded Execution

Redemptions must be bounded for Soroban resource limits. The final implementation should cap traversal and use slippage controls so each redemption fits execution limits and fails predictably if the requested route cannot complete.