[PASSED] Restructuring Redemption to Strengthen Peg

General Protocol
1

Context

During period of demand and supply imbalance, VST would depeg upward or downward. In case of a downward depeg, the protocol needs to take emergency action to ensure that the stablecoin comes back to peg, preventing a loss of confidence.

As of this writing, VST is currently trading at $0.977, roughly 2.3% off the dollar peg. The original defense against downward de-peg is redemption for underlying collateral. To learn more about redemption, please visit Vesta’s doc here: Redemption - Vesta.

Current Setup

  1. Some assets are not available to be redeemed upon, each with its own reason. ETH is not available to be redeemed upon due how it’s the most optimal collateral to back VST and so we want to minimize impact to ETH depositors. GLP and GMX are not available to be redeemed upon as they are revenue generator for Vesta.
  2. Redemption fee is set at 0.5% across the board. Due to how different collaterals have different liquidity profiles, some assets are being redeemed more frequently than the others. Therefore 0.5% across the board is rather not optimized.

Recommendation

  1. Redemption is enabled for all assets except for ETH, allowing any VST holders to redeem VST for collaterals. This minimizes impact to ETH within the system, which increases the quality of VST backing, and still allows arbitrageurs to come in and bid VST back to peg.
  2. Set minimum redemption fee for all assets to 2%. The higher redemption fee will decrease the arbitrage profit from redemption, dis-incentivizing arbitrageurs.

This is an immediate measure to alleviate the bad user experience brought about by redemption. In the medium term, we are going to add interest rate, which will help bring down supply in times like this and completely disable redemption.

Implementation

Triggering of redemption mode will be done via the protocol multi-sig.

Timeline

[Edited Oct 4th] This proposal will be live for another 24 hours before being moved into the voting stage, which will last 72 hours.

  • I support redemption mode
  • I do not support redemption mode

0 voters

2

This feels like a mess.

A proposal that has a big impact but has only 12 hours for discussion? Lots of people will not see it before it starts being voted on.

Will this not incentivize large players to mint lots of VST to add to the VST-FRAX pool for the price to go to $0.98 so they can redeem against e.g. GLP for a lower fee?
Is that why it’s through a multisig? That feels very messy.
What am I missing?

Is VST now soft pegged around $0.98?

Having your own inhouse built oracle sounds like it’s inviting possible errors/bugs and exploits.

The protocol should focus on its function and what it can do for users. It should not focus on earnings, especially when it’s so tiny and unknown. The fact that GMX and GLP can not be redeemed against currently since they bring in revenue for the protocol sounds bad.

Vesta used to feel like a L2 Liquity. It’s starting to feel like a cash cow for founders/token holders. Cap GLP rewards at 20%? Not brilliant.

Sorry for the critcism, but this proposal feels rushed and badly thought out while lacking detail. And what’s with mentioning that it feels not optimized to have 0.5℅ feea for everything and then having no follow up on that thought?

If I’m way off or missing something please correct me.

1 Like
4

Thanks for your response. The quick turnaround time I set was intended to push through a solution quickly to recoup peg back to $1. However I do agree that this is large endeavor that needs to have lots of discussion. On that note I will change the window to 72 hours and also involve Risk DAO into this discussion.

Your point raised regarding how this arrangement will incentivize large players to redeem for GLP at a discount is one that I did not think of so thank you for raising it. And of course VST is not meant to be pegged to $0.98, it’s meant to be pegged to $1. How do you think this flaw could be mitigated?

Regarding oracle, we have very high standard with it comes to security of our protocol but we are also working with other stakeholders to provide external validation such as audit and such.

Regarding how GLP and GMX cannot be redeemed against, your point is very valid. One point I do want to point out is that the revenue being accrued back to the treasury is all kept for future protocol growth effort. We do not take any dollar out to enrich any core contributors. Our focus on revenue generation is all for future protocol growth’s sake and I do not find any issue with that. However I do see how that needs to be balanced with other interests and I welcome all opinions on it. On that note, in this proposal we are indeed going to open up redemption against GLP and GMX.

5

Being a GMX and GLP depositer, what are the potential risks if this is implemented?

Just worried about the quick turn aroundof this proposal and the impact it may cause users who are not necessarily the most active within the crypto world.

6

I don’t think redemption makes too much sense in general.

You are small protocol, you want to grow and make revenue, this is good, but in growing will naturally cause peg to reduce.

I think this is ok and we should relax about it, people will unwind at some point, 0.98 is ok, 0.95 is temporarily ok too. It makes further expansion expensive for users and user driven deleverage attractive, this should be enough over time.

People like having security, and the fact your position can be unwound by others at a loss to you is worrying and not good for protocol.

I suggest you leave things unchanged - You are earning good fees from GMX/GLP - Overtime this will grow and should be used to further incentivse holding VST - Overtime the protocol can support more and more in curve for example. This is healthy, sometimes slow growth. It is also what the competition is doing, Abra, defrost, yeti finance.

Nothing wrong with trying something new, but imo this redemption feature will drive away customers, which currently provide protocol revenue.

At the moment, your peg may be off, but imo this is ok, nothing to panic about, the protocol is earning good revenue which will make VST VESTA more viable in the long term.

1 Like
7

It also looks like panic, you only just increased the GLP cap to $5mil, this caused the slight depeg, now you take panic measures to unwind. Change GLP cap to $4mil instead, and be patient. This is not a normal stable coin, and won’t drop exponentially. Drop is only caused by sudden growth. If others panic liability side will unwind when they want to. NO to PANIC MODE. NO to PANIC. Leave GLP.
Thanks

8

See it’s too late to cap at $4mil, so leave at $5m. But be comfortable, that the depeg is caused by this growth, it’s ok and not going to get worse, once $5mil is hit. Revenues over time should be used to support the peg using incentives or direct purchase of VST. Using the treasury in this way is exactly what will make the protocol successful in my view.

So instead of panic mode, use all revenues to support VST in variety of ways, other protocols have tested this. Once peg is back to 0.99, increase GLP cap to $6mil, and repeat. Over time, you’ll have a big successful earning protocol.

Panic mode is not the worse thing in the world of course, but it’s grow, then contract, grow then contract, this is sub-optimal, annoys people, makes them lose money, just pointless at least at this stage, nothing is wrong here.

1 Like
9

To make the proposal more formal, it would help if you define a minimum time before triggering it.
E.g., if the price is below 98 cents for at least 1 hour.

Naming wise, emergency mode used to mean something else in the vesta system, and also vst < $1 is not really a state of emergency.

I also share some of @ymoon and @Unnosh concerns about the affect it could have on the protocol growth.
At least from a risk point of view, the depeg is not a state of emergency. Though if the community sees it as such, then a potential loss of trust is a reason to be concerned.

Another reason of concern is that the chainlink price oracle accuracy is much worse than 0.1%, and thus, when the oracle deviates by more than that, the accounts that are being redeemed would have some loss.

That said, overall the proposal is technically sound (once a precise time frame is set), even though the oracle is somewhat experimental, the potential attack vector here is relatively bounded.

1 Like
11

I wrote some lengthy response that then disappeared when posted, so sorry if it actually appeared and this is a repost.

I don’t know how valid my opinion is, since I am not an expert. But I agree with ymoon that the downward depegging is expected because of the introduction of GLP as collateral, and I don’t think it is an issue.

I don’t see a problem with redemptions. I believe it is a great trust mechanism that the protocol has to maintain its service. Aren’t redemptions the reason that LUSD was/is over peg. Nobody has any fear that it will drop below $1 for an extended period of time. So redemptions, even without being exercised, create a feeling of trust that VST will maintain its peg. That makes people less likely to dump in fear, and more likely to buy waiting for it to go up again. Does that make sense?

My view of this emergency mode is that it increases complexity and uncertainty, especially since it is activated via multi-sig. If the redemption mechanism is working as intented, then it should become more attractive to redeem the lower VST depegs. If the redemption fee would be changed to 0.1%, I think it should rather be a permanent change.

How realistic would it be to use most of the protocol revenue to buy VST when it is below some threshold, and sell it when it is above some threshold? Then the protocol would make VST from arbitrage, as well as reducing the fear of redemptions. Any unused VST could then be deposited in bprotcol to increase VST holdings, or a separate lending market could be made for more risky assets with high interest and the revenue from that could be used to further support this system.

Also Mikey, I think core contributors should be incentivized greatly. Sorry for coming off differently.

2 Likes
12

I agree with some of the sentiments shown above - it does seem rather reactionary to introduce additional complexity and operational risks into a protocol.

I would prefer allowing more time to pass and allow the peg to stabilize normally through market forces while we explore ways to deepen liquidity and remove some of the selling pressures from VST.
These ideas could include:

  • Entering bribe wars, either through Aura or Convex (maybe GLP profits could be redirected there)
  • Exploring some possibilities for VST as collateral on other lending markets
  • Furthering partnership with Sperax (as they might be able to take off a lot of VST from the market), maybe even creating liquidity pairs between VST and USDs
  • Exploring some other partnerships, maybe Mycelium could take VST in their MLP token and we can create MYC vault in return
2 Likes
13

I’m personally against this idea. Maybe in times of extreme stress it could be triggered, like if VST goes to .95 or lower, but being at .977 as a small-but-growing protocol seems like a fine problem to have. I understand the value of redemption but it’s a bad UX when your vault is redeemed against.

Currently, vault owners are incentivized to buy VST off the market to pay down their debts at a discount. Given the high yield from the GMX and GLP vaults, I think it’s only a matter of time before some of the yield begins to stream back into VST to pay down debts and re-leverage.

Vesta just launched its most popular product yet (GLP) and it’s expected that a large amount of VST will be minted and sold which will temporarily drive it off peg. I think we should wait and let market forces work this out in time. This also means holding off on further GLP vault cap increases, which I think is fine.

1 Like
15

Hi all, thank you so much for your suggestions. I won’t address all of you individually, but please know that I’ve interpreted all your feedback. After reading all the info, I am now in the camp that Vesta needs to restructure redemption not toward allowing more of it, but rather discouraging it.

Redemption is the worst user experience as evident to what happened to Vesta ETH vault. Back in April, VST pegged was down to 98¢, and so Vesta and people redeemed lots of ETH positions. I believe close to 500k was redeemed from the ETH vault. The mass redemption coincided with the ETH vault declining in TVL. Effectively the redemption caused people to not come back since.

Why a depeg is not that big of an issue right now
Although the token is a stablecoin, people actually mainly use Vesta to lever on the underlying token. If VST <$1 when they open the position, it effectively increases their MCR. Say that original MCR is 110%, Alice opens a position with $110 and takes out 100 VST when VST is at 98¢, Alice’s debt value is effectively $98. So effectively, Alice’s MCR is 110/98 = 112.2%.

What We Did Already

Vesta has used the treasury to market buy 600k USDC worth of VST, pushing the peg back up to 99¢, decreasing the likelihood of redemption. We have also restored the original redemption fees of 0.5% as base fee, with fee subjected to increase if there’s redemption.

Immediate Further Solution

Upping A-factor

I’m going to get in touch with Curve and Balancer to up the a-factor of the VST liquidity pools so that the peg doesn’t get out of whack so quickly.

Make Redemption Harder

We are looking to change base redemption fee from 0.5% to a higher number and make the redemption fee go up faster if lots are happening. If this number is 1%, then VST would theoretically depeg and stabilize to 99¢. Although it would depeg slightly further theoretically, it would discourage redemption, drastically improving borrowing experience.

Further Solution

As with anything, VST could be brought back to equilibrium via 2 ways. Increasing demand and decreasing supply.

Decreasing Supply

Hope for a bear market. This is how VST re-pegged back in May and June. People will decrease their debt position (or get liquidated) causing decrease in supply. This isn’t something in our control and also it’s bad for growth so it’s not something we should put too much thoughts into.

Increasing Demand

Short Term

Using treasury to buy back VST. This will bring the token back to peg in the interim, but as long as we increase supply, this will always be an issue. Unless a bear market happens, as long as we increase VST mint cap/onboard new popular collaterals, Vesta will always have to buy VST back to bring it back to peg.

Medium Term

The stablecoin gauges. With the escrow reward system that we are building, we will be able to attract fellow projects on Arbitrum to create liquidity pools with VST. The resulting liquidity pools effectively become another venue to park VST.

Long Term

V2 will have to balance supply and demand better on a protocol level. Necessary supply shrink can be enforced by interest rate when VST goes below $1. Artificial mint can be done when peg goes above $1.

Stablecoin gauges in this sense will be a very important project. We need to make sure that the technical side has no hiccup and the BD side will have to push super aggressively.

1 Like
16

To decrease the amount of redemption but make redemption more equitable across the board, I suggest enabling redemption for all assets (except for ETH as it is the most desirable asset to secure VST with) but change base redemption fee from 0.5% to 2% to make redemption arbitrage less profitable, discouraging redemption.

I’m also devising an interest rate model that will help with managing supply of VST. During times like this where VST peg is suffering from over-supply, the interest rate will react by increasing, facilitating some vault openers to decrease debt. This completely deletes the need for redemption. I’ll create a separate RFC for this topic.

2 Likes
17

redemption is what keeps the peg strong… I do not agree that it should be discouraged. eth collateral didn’t come back because you can just as easily take leverage on eth using liquity (it’s the same product but more established)

Instead of being worried about having the protocol backed by eth… let the protocol work the way it was intended. redemptions are important to the peg. If you will increase redemption fee, we can’t ALSO then introduce interest rates… arbitrage is a good thing.

18

Redemption makes for a strong peg but ultimately it’s extremely bad for the user experience, and will drive people to competing protocols without redemption. It’s one of the reasons Liquity has struggled so much with growth against apps like Maker; it’s nice to hold LUSD but not so nice to mint it. I don’t really view Liquity as a Vesta competitor because it’s only on mainnet and it’s only for ETH- the main competitors for Vesta are apps like MAI or MIM that can move more quickly to onboard semi-exotic collateral like GLP.

Right now Vesta has strong products in the gOHM and GLP vaults and I think we should play to our strengths. Protect user vaults by disabling redemption or only enabling it in emergencies, and use vault interest or yield to bring VST back to peg.

19

I was thinking partnering with Frax to build an AMO would be a better solution as the peg basically relies on the VST/Frax curve pool. Vesta building a treasury of Frax would also help, if they had a 4 million treasury of Frax, they could just deposit it, restore peg and earn interest on it.