# Redemptions and INCD Price Stability

**How does INCD closely follow the price of USD?**

The ability to redeem INCD for INC at face value (i.e., 1 INCD for $1 of INC) and the minimum collateral ratio of 110% create a price floor and price ceiling (respectively) through arbitrage opportunities. These are referred to as "hard peg mechanisms" since they are based on direct processes.

INCD also benefits from less direct mechanisms for USD parity — called "soft peg mechanisms." One of these mechanisms is parity as a Schelling point. Since INCD Protocol treats INCD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the borrowing fee on new debts. As redemptions increase (implying INCD is below $1), so too does the base Rate — making borrowing less attractive, which keeps new INCD from hitting the market and driving the price below $1.

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**What are redemptions?**

A redemption is the process of exchanging INCD for INC at face value, as if 1 INCD is exactly worth $1. That is, for x INCD, you get x Dollars worth of INC in return.

Users can redeem their INCD for INC at any time without limitations. However, a redemption fee might be charged on the redeemed amount.

Note that the redeemed amount is taken into account for calculating the base Rate and might have an impact on the redemption fee, especially if the amount is large.

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**Is a redemption the same as paying back my debt?**

No, redemptions are a completely separate mechanism. To pay back your debt, you simply adjust your Vault's debt and collateral.

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**How is the redemption fee calculated?**

Under normal operation, the redemption fee is given by the formula:

**(base Rate + 0.5%) \* INC drawn**

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**How is the base Rate calculated?**

Redemption fees are based on the base Rate state variable in **The INC Printer** Protocol, which is dynamically updated. The base Rate increases with each redemption and decays according to the time passed since the last fee event — i.e., the last redemption or issuance of INCD.

Upon each redemption:

1. Base Rate is decayed based on time passed since the last fee event.
2. Base Rate is incremented by an amount proportional to the fraction of the total INCD supply that was redeemed.

The redemption fee is given by:

**(Base Rate + 0.5%) \* INC drawn**

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**As a borrower, do I lose money if I'm redeemed against?**

If your Vault is redeemed against, you do not incur a net loss. However, you will lose some of your INC exposure. Your Vault's collateral ratio will also improve after a redemption.

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**How can I avoid being redeemed against?**

The best way to avoid being redeemed against is by maintaining a high collateral ratio relative to the rest of the Vaults in the system. Remember: The riskiest Vaults (i.e., lowest collateralized Vaults) are first in line when a redemption takes place.
