For edits, please see the end of this post for the list of edits.
Motivation
- Since introducing popular collaterals types, Vesta has consistently run into liquidity crunch where VST would depeg downward as people sell the VST immediately after producing it from a vault.
- This was often alleviated by a market downturn (May 2022 and early November 2022) as falling prices force people to repay loans and close their vault positions. However, this is not a very sustainable solution as we cannot control when market downturns happen and a downturn is technically against the interest of the protocol. The protocol succeeds based on people collateralizing more crypto assets.
- On Nov 25, Vesta introduced Vesta Reference Rate, which shifted the downward peg defence mechanism from redemption to a dynamic interest rate that reacts to the peg. Vesta now has a source of revenue that could be used to facilitate the growth of the project in a sustainable manner.
Proposed Solution - Vesta Saving Module
Summary
The Saving Module is a place where users can lock up VST for a period of time to earn an interest rate. The locked up VST will be used to backstop liquidation (similar to the current stability pools, but is second to order to the current stability pools), further securing the system against long-tail event. Such an arrangement would effectively make VST the most secure crypto-backed stablecoin in the whole market. The interest rate revenue is funded by the interest that is paid by users on their minted (i.e. borrowed) VST based on the Vesta Reference Rate model.
Overview
- Enter anytime - users will be able to enter into the Saving Module at anytime and the locked up amount will receive the interest rate emission. Users will not be able to claim the locked amount until the lock period expires.
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Deposit timelock - the Saving Module will have a max time lock of 90 days, and users will be able to select any number of lock up time between 0 to 90.
- We are utilizing the veCRV model for the time-lock, providing people with multiple choices on the time-lock.
- The longer someone locks up for, the more reward he or she will get on a linear scale. For example, if someone locks up for 90 days, he would get all the reward. On the other hand, if someone locks for 30 days, he would get 1/3 as much reward as the person who locks for 90 days.
- The upper limit time lock is determined by duration of historical peg cycles.
- Vesta will provide the option of auto re-locking so they don’t have to come back every month to re-lock.
- Funded by Vesta Reference Rate - the incentive will be fully funded by Vesta Reference Rate. Please see this link for more information on the Vesta Reference Rate. A portion of VRR will be dedicated toward the Saving Module.
- Emission tuning based on peg - since the Saving Module is likely to attract capital away from LP and potentially even attract external capital to buy VST, we plan to tune the emission according to the peg of the stablecoin. When the peg approaches $1, VRR decreases, the Saving Module reward rate would decrease, and vice versa.
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General stability pool - the locked up capital in the Saving Module will be used to backstop liquidation if any stability pool is empty. Please note that the asset-specific stability pools will still have priority treatment when it comes to liquidation. Only when a asset-specific stability pool runs out of capital will the capital in the Saving Module be used.
- Liquidation by the Saving Module will work the same way as stability pool with liquidation bonus. When a position is underwater and the asset-specific stability pool cannot cover it, the general stability pool will be used to liquidate and the liquidated collateral would be eligible to be claimed as the collateral is distributed to every in the pool on a pro-rata basis.
Implementation Plan
Initially, we plan to implement both yield cap and capacity cap. Effectively, the emission will be calculated by min{highest possible emission enabled by VRR × VRR’s allocation toward the Saving Module, amount of emission needed to sustain 10% for all capital within the Saving Module}.
Yield Cap
We plan to start the Saving Module with a 10% yield cap. The yield cap is in place to minimize APR dilution especially for those who enter into the Saving Module early.
Yield cap’s selection criteria is mainly influenced by the relative cost of minting. The Saving Module’s yield should not exceed cost of mint by too much or it would encourage arbitrage.
Capacity Cap
We plan to start the capacity of the Saving Module at 1m at adjust accordingly. The capacity cap is in place so the team can monitor where is the capital flowing from.
Capacity cap is mostly in place to let the team monitor initial capital flow. Over the long run the amount in the Saving Module should correlate with the amount of VST needed to bring VST back to peg.
VRR Allocation Cap
VRR’s allocation toward the Saving Module will also be adjusted. VRR will not be fully allocated toward the Saving Module as the rest will still go to the emergency reserve to be used in case of severe situations, such as severe VST depeg. We plan to initiate that parameter at 70%.
Monitoring
- Overtime, we’ll be monitoring for two data points:
- The peg: how much of the Saving Module were from people swapping in from other assets? how much of the Saving Module’s capital are from internal deposit places such as the liquidity pool and the stability pools?
- If majority of capital comes from internal depositing pools + new VST minted, then the structure is not ideal and not achieving the goal of fixing the peg.
- The equilibrium rate that the users accepts for the lock up time required.
- 10% is an interest rate that we will target for the start, but overtime people may find it high or low.
- The peg: how much of the Saving Module were from people swapping in from other assets? how much of the Saving Module’s capital are from internal deposit places such as the liquidity pool and the stability pools?
Alternative Approaches
Incentivizing LP directly
Incentivizing LP directly would attract capital to enter LP directly but it is a rather “non-targeted effort” as people could enter LP with VST, which would not help with the peg. Current incentivization schemes such as gauges are also facilitators of farm and dump as many gauge programs (such as veBAL gauge) do not support extended vesting on reward. We plan on tackling the part of expanding LP with our new staking program once that becomes available. By then, the Saving Module and LP incentives could be live at the same time as these two items are not mutually exclusive.
Setting Up a USDC or FRAX Single Pool to Buy VST
Vesta could take the approach of asking people to deposit USDC or FRAX directly, which will then be swapped to VST by Vesta to support the peg. This will directly push the price of VST back up but there’s a critical issue here: we cannot guarantee that at the time of redemption (end of the time lock) we can swap the bought VST back to USDC at a level that we bought the VST. This is extremely likely if VST supply is constantly growing and that the lock time does not guarantee a time of decreasing demand.
Timeline
We plan to iteratively scale this product, with the initial version being a simple one for the purpose of monitoring behaviors.
Further iteration of the Saving Module will see the boost mechanism being implemented along with a supposedly new staking program and the capital being mobilized by Vesta. For the initial version, Vesta will not utilize this capital for any means. Any change to this policy will go through governance.
We look to enter the implementation stage immediately after this proposal passes. We expect this project to take less than a month to implement.
Edits
2022/12/30
- Included auto-lock feature
- updated to included the use of Safety Vault’s capital toward backstopping liquidation - effectively having safety vault as a general stability pool that liquidates after the single stability pool runs out. Such an arrangement would effectively make VST the most secure crypto-backed stablecoin in the whole market.
- Added another parameter: VRR Allocation Cap
- updated the target yield to a lower level of 7%.
2023/01/17
- Changes locking system to look more like vote-escrowed CRV, where users will have the option to lock in CRV to earn more. After consulting with Risk DAO, we realized it’s better to utilize the veCRV model so the protocol may gauge for how long people would like to lock up for. In the new design, users will have the ability to lock in VST for either 30, 60, or 90 days. We did not go with a continuous lock time as discrete time is better in terms of implementation.
- Changes yield cap to 10% to be more in line with current market condition.
2023/01/18
- Changing the name of the feature to Vesta Saving Module to prevent confusion with the word vault.
- Changing locking system to be continuous. People now have the option to select any number of days they want to lock for.