nTokens redemption

nTokens are freely redeemable for a proportional share of all the assets in the nToken account. Upon redemption, users receive a single net cToken amount by converting their share of the nToken account's fCash to cTokens via the on-chain liquidity pools. The entire redemption process occurs in the space of a single transaction. Find more detail on the nToken redemption process including an example here.

nToken redemption slippage

nTokens accrue residuals as a byproduct of trading activity. If users are net borrowers, nTokens will have a net positive fCash position or "positive residuals". Conversely, if users are net lenders, nTokens will have a net negative fCash position or "negative residuals". These size of these fCash residuals have an impact on the cost of redeeming nTokens.

As an example, if the nToken account has positive fCash residuals, an nToken redemption will cause the nToken to borrow (sell fCash) from that liquidity pool and push the interest rate higher. As redemptions occur, the residuals become larger relative to the pool's liquidity*. Under normal market conditions, nToken redemption slippage is relatively low and increases as residuals get larger.

Scenario	Slippage (redeeming 10% of nTokens)	Slippage (redeeming 20% of nTokens)
No residuals	0%	0%
1.0% increase in rates**	0.05%	0.07%
2.0% increase in rates**	0.13%	0.18%
3.0% increase in rates**	0.22%	0.34%
4.0% increase in rates**	0.33%	0.58%
5.0% increase in rates**	0.48%	0.91%

*Under stressed market conditions the existence of residuals can pose risks in the nToken redemption process. Because redeeming nTokens involves trading residuals for cash, nToken redemptions push liquidity pools toward boundary proportion values. A large amount of nToken redemptions could lead to a scenario where interest rates become exceptionally high or exceptionally low. In order to mitigate this risk, leverage thresholds and liquidity pool parameters are set such that market forces will bring liquidity pool proportions down from dangerous levels if they get there.

** If the LP is initially providing liquidity at 4% interest rates.