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Borrowing at 0.5%

· 2 min read
Alexandre
Alexandre
CEO

You want to borrow USDU at a very low interest rate against your BTC but are wondering about the risk of redemptions?

And is it necessarily bad to be redeemed? Let's explain simply 👇

What are redemptions?​

Redemptions are a mechanism that allows any holder of USDU to redeem it directly with the protocol for BTC — at a fixed rate of 1 USDU = 1 USDC worth of BTC.

This mechanism ensures that USDU quickly returns to its peg whenever it trades below $1.

Why do redemptions matter?​

Imagine a scenario where USDU slightly depegs to the downside:

👉 1 USDU = 0.95 USDC on the market.

Here's what an arbitrageur can do:

  • Buy 1 USDU for 0.95 USDC
  • Redeem it in the protocol for 1 USDU = 1 USDC worth of BTC
  • Sell the BTC for ~1 USDC

Result: a ~5% profit 💰 (excluding redemption fee — more on that below)

This arbitrage restores the peg by removing underpriced USDU from circulation.

What about redemption fees?​

Each redemption has a 0.4% fee, which doesn't go to the protocol — it goes to the position that was redeemed from.

So if your position is redeemed, you receive that 0.4% bonus in USDU for the BTC that leaves your position.

It's basically like selling part of your BTC at a 0.4% premium. Not that bad.

Who gets redeemed first?​

Redemptions target positions with the lowest interest rates first.

Why? Because those users enjoy the best borrowing conditions — the lowest cost of capital — but that benefit comes with a small tradeoff.

It's all about risk–reward balance:

➡️ Lower rates = better deal, but higher chance of redemption

➡️ Higher rates = more costly, but safer from redemptions

Every borrower chooses their own balance between cost and exposure — that's the beauty of this mechanism which allows user-defined interest rates. All credits to Liquity

So… is it bad to be redeemed?​

Not really.

When your position gets redeemed:

  • You lose a portion of BTC collateral
  • Your debt decreases by the same amount
  • You receive a 0.4% fee bonus in USDU

In practice, it's like partially selling BTC above market price — while your loan gets smaller.