Shade Protocol Community,
As a result of the growing deviation between the market and peg rate for SILK, Shade Protocol recently moved to perform collateral redemptions on a single ShadeLend vault and swap the collateral for SILK in order to drive the market price for SILK back to its peg price while reducing the supply of SILK. As a result of the cycles of collateral redemption and open market swapping, the DAO successfully pushed the market price of SILK closer to peg while still ensuring that borrowers are still in a profitable position (as a result of the repayment of debt pro rata and distribution of part of redemption fee).
Context for Collateral Redemptions:
ALL borrowers can take advantage of the debt arbitrage opportunities presented by under pegged SILK at ALL times.
Shade Protocol, via redemptions, can also capture this arbitrage value (until redemption fee exceeds market discount) while defending SILK’s market rate and distribute it to SHD stakers in a democratized fashion.
Redemptions repay a pro rata share of the Vault’s debt and return a pro rata share of the Vault’s collateral to the redeemer. You can learn more information about SILK stability mechanisms including collateral redemptions in the Shade Protocol docs
The SILK Stability Restoration for Underpeg Scenarios forum Post outlines the mechanism and process of redemptions, as well as the impact on all relevant parties (borrowers, DAO, SILK holders).
Redemptions are considered a “last resort” method of defending the SILK price in the market, and historically have only occurred when market rate deviations from peg are greater than 10%.
Historical Account of Collateral Redemption Usage:
The first instance of the Protocol performing collateral redemptions was October 9, 2023 in order to defend against a ~10% market rate deviation from peg rate.
The first tranche of collateral redemptions involved ~1% of collateral redeemed from the USDC.axl vault, with 11.1k SILK debt being paid off in the process. Afterwards, the USDC.axl was swapped for SILK on ShadeSwap which pushed the price of SILK from $0.97 to $0.995. After collateral redemptions were performed, borrowers began repurchasing SILK at a discount and paying off their SILK debt (as shown in chart post time of redemption)
This 2nd instance permissioned redemptions occurred occurred on September 4th 2024, this time to address a ~13% market rate deviation from peg.
The second tranche of collateral redemptions involved redeeming ~23% of USDC.axl collateral from the USDC.axl vault, with ~33.1k SILK debt being repaid in the process. Afterwards, the USDC.axl was swapped for SILK on ShadeSwap which pushed the price of SILK from $1.01 to $1.076, effectively reducing the market rate deviation from ~13.1% to ~7.5%. No other vaults had collateral redeemed.
After collateral redemptions were performed, borrowers began repurchasing SILK at a discount and paying off their SILK debt (as shown in chart post time of redemption), with a notable decrease in SILK’s market deviation from 8.4% to 4%. In the process of performing debt arbitrage via Collateral Redemptions, the protocol netted ~3.1k SILK in profit.