> ## Documentation Index
> Fetch the complete documentation index at: https://docs.batt.farm/llms.txt
> Use this file to discover all available pages before exploring further.

# How it works

> How minting, repayment, and redemptions support the KRW* peg.

[한국어로 읽기](https://docs.batt.farm/mechanism.md)

KRW\* targets a price of ₩1. batt issues it against crypto collateral worth more than the debt. Redemptions and other mechanisms give traders an incentive to bring the market price back toward that target.

## Minting and repayment

When you deposit collateral and borrow KRW\*, batt records your collateral and debt in your [position](https://docs.batt.farm/en/glossary.md#position). Your collateral's value in won must exceed your debt and meet that market's collateral requirements.

Repaying KRW\* reduces your debt. batt burns the tokens used for repayment. Once you have paid the full debt, including accrued interest and applicable costs, you can recover the remaining collateral.

See [How to use KRW\*](https://docs.batt.farm/en/use-cases.md) for the borrowing and repayment steps.

## Below ₩1: redemptions

Through a [redemption](https://docs.batt.farm/en/glossary.md#redemption), a KRW\* holder exchanges tokens for collateral from borrowers' positions at the protocol's reference value in won. This differs from repaying your own loan.

Suppose KRW\* trades at ₩0.98. An arbitrageur could make the following trade:

**1. Buy KRW* on the market*\*

Buy 1 million KRW\* for the equivalent of ₩980,000.

**2. Redeem it for collateral**

Submit the KRW\* to the protocol and receive collateral with a reference value of ₩1 million, less the redemption fee.

**3. Sell the collateral and subtract costs**

Subtract what you paid for the KRW\* and all transaction costs from the proceeds of the collateral sale to calculate the profit or loss.

If the collateral sells for its ₩1 million reference value and there are no fees, gas, or collateral sale costs, the profit would be ₩20,000. If actual costs exceed that amount, the trade loses money. These prices are illustrative.

Buying KRW\* for redemption creates demand. Burning the redeemed tokens reduces supply. Both changes encourage the market price to recover.

### Which positions are redeemed?

When a redemption is assigned to a collateral market, batt starts with that market's lowest-rate positions. It reduces each affected borrower's debt and removes the corresponding collateral. A position can be redeemed even when it has enough collateral.

[Managing your position](https://docs.batt.farm/en/manage-position.md#interest-rates-and-redemptions) explains how your rate affects the queue and how a redemption changes your balances.

## Above ₩1: new issuance

If KRW\* trades above ₩1, borrowers can deposit collateral, mint KRW\*, and sell it at a premium. They still owe the debt and interest and must manage their collateral.

The extra income from selling above the target price needs to justify the costs and risks. The premium can persist if borrowers lack collateral, face limits on issuance, or cannot trade with enough liquidity.

## The peg is not guaranteed

Redemptions and minting do not guarantee an immediate return to ₩1. Price recovery also depends on the following conditions.

| Condition | What can go wrong |
| - | - |
| Accurate, timely price data | Collateral valuations and exchange reference values may diverge from the market. |
| Liquidity for KRW\* and collateral | Execution costs may exceed the price difference. |
| Sufficient collateral and liquidation funding | Liquidations may be delayed or leave losses. |

[Liquidation](https://docs.batt.farm/en/glossary.md#liquidation) deals with debt in undercollateralized positions. It serves a different purpose from exchanging KRW\* for collateral through redemption.

> [card] [Manage rates and collateral](https://docs.batt.farm/en/manage-position.md)
>
> See how redemptions and liquidations affect a borrower's collateral and debt.

> [card] [Liquidation waterfall](https://docs.batt.farm/en/liquidation-waterfall.md)
>
> Follow the SP, JIT, and redistribution steps and their limits.


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