Vesta does not have much market share in the largest collateral asset on Arbitrum, ETH. Abracadabra has $72m of ETH collateral locked, with $7.11m worth of MIM borrowed against it. In contrast, Vesta only has $2m worth of ETH collateral locked, with $0.7m worth of VST borrowed against it. It looks like ETH holders do not want to borrow VST. Tellingly, ETH is not the largest collateral asset on Vesta. That honor goes to GOHM, by a large margin. If Vesta can capture more ETH market share from Abracadabra, both the TVL and fee revenue of Vesta will grow exponentially.
The reason why Abracadabra dominates in this space, is likely because they give Borrowers a much better deal. Abracadabra’s liquidation penalty is much lower at just 5%, and in the event of a MIM depeg, Borrowers can help to repeg MIM by buying cheap MIM and repaying their debt, profiting off the depeg in the process. In contrast, Vesta charges a much heftier liquidation penalty on ETH at 10%, while penalising Borrowers regardless of which direction VST depegs. If VST depegs upwards, the value of the Borrower’s loan has gone up, and it costs more to repay. If VST depegs downwards, Borrowers risk being forcefully liquidated at a 0.53% penalty through the redeem function. Borrowers lose no matter what. In view of this, there is no incentive for ETH collateral holders to borrow VST, as a MIM loan is more advantageous in every scenario.
To make VST loans more attractive to ETH collateral holders, I propose to remove the redeem function altogether, as it is a constant threat hanging over the heads of borrowers. A borrower could be prudent and responsible, but still be liquidated at a 0.53% penalty in the event of a significant depeg, through no fault of his own. To avoid this, Borrowers have to keep a much higher collateral ratio then they would have liked, reducing the capital efficiency of their collateral.
It’s been proven that overcollaterallised stablecoins are good at keeping their peg, as borrowers are incentivised to buy the stablecoin and repay. A bad debt situation is not necessarily fatal; Abracadabra has 3.62% (https://bad-debt.riskdao.org/) of it’s portfolio in bad debts, but holds strong anyway. In Vesta’s current state less the redeem function, a significant depeg should not stay for long, except in a black swan event where a contract is exploited, or OHM price wicks down faster then it can be profitably liquidated. The latter case would not be fatal to Vesta if a more stable asset like ETH or BTC was the major source of VST loan, instead of GOHM which currently makes up almost 70% of all VST loan origination.
Alternatively, if redemption must be kept to protect Vesta from GOHM, allow the redeemed trove to keep the redemption fee, instead of distributing it as protocol fees. This allows the borrowers to at least participate in the gains of a depeg, similar to Vesta’s competitors, instead of punishing them for every depeg.