Vesta Finance Overview
Vesta Finance is a lending protocol launching on Arbitrum that offers borrowers interest-free lending with low collateral requirements.
Vesta enables borrowing with a minimum collateralization of only 110% compared to typical requirements of 150-180% in DeFi.
Users deposit collateral to mint VST (Vesta stable) - a USD-pegged stablecoin. Initial collateral on the platform will be ETH, renBTC and gOHM - however, more collateral types will be added in the future.
Vesta v1 is a fork of Liquity, with key differences such as community governance, additional collateral types, and layer-2 focus.
Vesta is pre-launch, with no launch date announced (expected early 2022) and no website as of yet.
Key Components
- Vaults: Users deposit collateral into a vault - which essentially acts as a collateralized debt position tied to their wallet address.
- VST Stablecoin: The collateral deposited into vaults can be used to mint Vesta Stable (VST) - a USD-pegged stablecoin.
- Low collateralization requirements: Vesta’s minimum collateralization ratio is initially set at
- 110% for ETH
- 110% for renBTC and
- 150% for gOHM
- Stability Pool: Users deposit VST in the Stability Pool to earn VSTA rewards and collateral from liquidated vaults.
- Immediately redeemable: All VST holders can redeem VST for underlying collateral at any time. Vesta’s redemption mechanism and algorithmically adjusted fees are designed to ensure VST does not fall below a 1:1 peg with USD.
How It Works
Minting VST Users open a collateralized debt position (“vault”) and deposit collateral. This collateral can be used to issue VST.
For example, a user that deposits $1000 worth of ETH can issue a maximum of 909.09 VST (110% minimum collateralization). The VST then becomes freely exchangeable while in circulation. If the user decides to redeem VST for the underlying collateral, the VST is burned. If a vault falls below the minimum collateralization ratio (“MCR”), it is deemed undercollateralized and vulnerable to liquidation.
USD Peg
Vesta Finance includes the following mechanics in order for VST to maintain its 1:1 peg with the USD:
- The system is designed to always remain over-collateralized meaning that the USD value of collateral always exceeds the USD value of issued VST.
- VST can be redeemed at any time meaning that users can always exchange their VST for their underlying collateral. This will incur a fee.
- Vesta can algorithmically control VST generation through a variable issuance fee. For example, if there are more redemptions happening VST could start trading below $1. To counteract this, the VST issuance fee increases, discouraging borrowing.
Liquidation Mechanics
Vesta uses a two-step liquidation mechanism as follows:
- Undercollateralized vaults are offset against the stability pool containing VST tokens (this should cover most liquidations).
- If the stable pool is not enough to cover this, the remainder of the vault being liquidated is redistributed to other borrowers.
When a liquidation occurs, the liquidated debt is canceled by the same amount of VST in the Stability Pool and the liquidated collateral is distributed among the depositors of the Stability Pool.
This should be profitable for Stability Pool depositors as the value of the liquidated collateral should be greater than the value of the canceled debt. This is because the value of the liquidated vault will most likely be just below the minimum collateralization ratio e.g. 110% for ETH. Vesta expects that even in extreme cases the value of the liquidated vault will remain above 100%, therefore, making it profitable.
Stability Pool depositors make money when there is a collateral surplus i.e. when the value of the undercollateralized vault exceeds the VST debt.
Collateral Surplus = $(collateral) - debt
Example:
- ETH collateral value = $1090 (undercollateralized)
- VST debt = $1000
- $1000 VST in the stability pool is burned (borrowers debt is offset).
- The ETH collateral (worth $1090 at time of liquidation) is distributed among the stability pool.
- Essentially, the borrower is liquidated and collateral is distributed among depositors. The borrower retains the VST borrowed.
After multiple liquidations, a deposit will have (a) absorbed VST losses and (b) received collateral gains. The remaining is called the compounded deposit.
Stability Providers expect a positive ROI on their initial deposit. That is
$(collateral Gain + compounded deposit) > $(initial deposit)
Eventually, a user's deposit may be reduced to 0 as it is fully ‘used up’ in absorbing debt. This will occur when a liquidation empties a stability pool. When this happens, the user’s deposit will stop earning collateral gains.
Liquidators and Gas Compensation
It is important that undercollateralized vaults are liquidated quickly to keep the system healthy. To ensure that there is no disincentive to immediately liquidate uncollateralized vaults, Vesta will ensure that the gas costs for initiating the transaction are compensated. This means that liquidators should always at least break even.
Gas compensation comprises:
- VST: when a borrower mints VST, some VST is taken as a liquidity reserve.
- Collateral is taken from the liquidated vault.
Gas compensation per liquidated vault is given by the formula:
- Gas compensation = 50 VST + 0.5% of the vault's collateral
The purpose of this is to ensure that all vaults are liquidated promptly. The larger the vault, the greater the incentive to liquidate.
VST Redemption
All VST is redeemable directly with the Vesta system - regardless of whether or not you have a vault. This is exchangeable for the US dollar value of the underlying collateral (with a redemption fee). This results in the VST being burned and the underlying collateral withdrawn.
Redemption Design Vaults are redeemed in ascending order of their collateralization ratio e.g. vaults with the lowest collateralization ratio will be redeemed first, vaults with the highest collateralization will be redeemed last.
Partial redemption In most cases, redemptions will not be fully covered by a whole number of vaults, resulting in a partial redemption to fulfill the order. Partially redeemed vaults remain active.
Redemptions help maintain the USD peg Vesta claims that the economic design of the redemption mechanism creates a hard price floor for VST - ensuring its market price stays at or near $1. Direct redemptions will always exchange $1 underlying collateral for 1 VST. If VST falls below $1 arbitrageurs can buy VST and redeem it against collateral.
Recovery Mode
The system will go into Recovery Mode when the total collateralization ratio (TCR) of the system falls below the critical collateralization ratio (CCR) for that collateral. The recovery mode is designed to incentivize borrowers to behave in such a way that quickly raises the TCR above the collateral’s CCR and incentivizes VST holders to replenish the Stability Pool.
TCR: the ratio of the dollar value of the entire system collateral to the entire system debt.
- TCR: Collateral/Debt
CCR: the minimum collateralization of the system. If it falls below this threshold, the system enters Recovery Mode.
- In recovery mode, liquidation requirements are eased and borrower transactions that would further reduce the TCR are blocked.
- New VST can only be issued by improving the collateralization ratio of existing vaults, or opening a new vault with collateralization greater than the collateral’s CCR.
- If an existing vault’s adjustment reduces its collateralization ratio the transaction will only be executed if the TCR is above the collateral’s CCR.
The economic design of the recovery mode is intended to encourage collateral top-ups and debt repayments and act as a deterrent. Vesta states that the protocol design and possibility of recovery mode creates strong incentives for the system not to reach this outcome, therefore, making it unlikely.
VSTA Tokenomics
The VSTA token allocation is broken down as follows. There will be a total supply of 100m VSTA. The Vesta team has not provided an exact percentage breakdown of how this is allocated, however, it is clear that slightly over 50% of tokens will be a community treasury for partnerships and incentives. This indicates that Vesta will be a very community-oriented project. Tokens are allocated towards Liquity (as a Liquity-friendly fork) and also OlympusDAO. No official partnership has been announced with Olympus, however, it would be unusual for a relatively large token allocation without some sort of partnership.
Source: Vesta Docs
Value Capture: Revenue Share Staking VSTA entitles the holder to a share of the protocol revenue generated by (a) Redemption fees and (b) Staking
This positively aligns the incentives of VSTA token holders and that of the protocol, as it contains a clear value capture mechanism and incentivizes token holders to lock up their tokens.
Stability Pool VSTA Rewards and Issuance
Stability Pool depositors will receive VSTA rewards. There will be a (provisional) annual reward “halving” schedule. 1.2mm VSTA has been allocated for Stability Pool rewards. Depositing VST early into the pool could be a good farming opportunity for those bullish about the project.
Governance
VSTA token holders will be able to vote on relevant parameters such as:
- Interest rates
- Minting fee rate,
- New collateral types.
Vesta V1 will incorporate a BarnBridge governance model to prevent bad actors from intentionally damaging the protocol. At a very high level, community members with a demonstrated interest in the project submit ideas to an integration team that assesses their feasibility. If deemed feasible, the proposal will be put to a community vote.
Governance will be conducted on Snapshot. Votes will be passed when a quorum is reached - the specific figure of this is yet to be released.
Token holders can vote on
- Liquidation Ratio
- Minimum collateral ratio
- Critical collateral ratio - minimum collateral ratio under recovery mode
Liquidation
- Minimum amount of VST required to mint when opening a vault
- Liquidation fee
Opening/minting
- Borrowing fee floor
- Borrowing fee ceiling
Redemption
- Floor of redemption fee
Roadmap
Full On-Chain Governance As noted above, Vesta V1's governance will follow that of Barnbridge’s Genesis DAO whereby governance is conducted via Snapshot and is executed by a multi-sig manually.
Vesta V2 aims to incorporate full on-chain governance in order to further decentralize the protocol. This will enable users to vote on parameter changes which will be executed automatically on-chain.
More Collateral Types Vesta will onboard more collateral types to be eligible to mint VST. The protocol has indicated it will add more base tokens, as well as lending tokens like Aave tokens, and high liquidity tokens on Arbitrum. A Chainlink node and oracle contract will be hosted to facilitate this. Parameters for assets will differ depending on the volatility and liquidity of the assets.
L2 and Multichain Expansion Vesta will expand from Arbitrum to other major Ethereum L2 solutions such as Optimism. This is in line with the vision of becoming the biggest lending protocol across all L2s. Vesta also intends on expanding to non-EVM ecosystems such as NEAR and Solana. Vesta will be implemented in Rust to support these ecosystems. The intention is to have VST across all major blockchain ecosystems.
Angel Round and Advisors
Vesta completed a small round with very high-profile angel investors. The team has stated that their selection was due to the angel’s demonstrated contribution to projects. The team has also indicated tokens will be allocated in the future to “future contributors and other strategic parties”. It is worth noting that the valuation, price and unlocking schedule for angel investors has not been disclosed. In the Vesta discord, it was mentioned that the vesting schedules of angels are the same as that of contributors. However, this is yet to be officially confirmed.
Angel investors include
- @Not3Lau_Capital (Advisors, Lau Brothers)
- @dcfgod (Advisor)
- @Fiskantes
- @Tetranode (Crypto Whale)
- @samkazemian (Sam Kazemian)
- @0xmons
- @sassal0x (Anthony Sassano)
- @econoar Eric Conner
- @nanexcool Mariano Conti
- @Shuyao_Kong Shuyao Kong
- @WartuII
- @calchulus Calvin Chu
- @0xWangarian (Darryl Wang, Defiance Capital)
- OmniscientAsian
- PopcornKirby
- Nick Chong
- Jae Chung
- Feir and more.
In addition, OxMaki is an advisor and is stated as being heavily involved in all aspects of the project’s design. 0xMaki is widely regarded as a superb builder after rising to prominence working on SushiSwap.
Vesta vs Liquity
Vesta Finance v1 is a Liquity-friendly fork. Liquity is a successful Ethereum-based protocol with $1.66bn ETH in its troves (vault equivalent) and $789m LUSD (VST equivalent). The key differences between the two protocols are as follows:
Collateral types: Vesta - ETH, renBTC, gOHM Liquity - ETH
Governance Vesta - Community governance on protocol parameters Liquity - No governance. Immutable
Chain Vesta - Arbitrum Liquity - Ethereum
Vesta’s strong team, combined with the proven success of Liquity bodes well for the project. Vesta’s differences could give it some advantages over Liquity:
- Vesta’s focus is on the Ethereum L2 ecosystem which has far lower fees making it more user-friendly. In addition, the Vesta multi-chain roadmap demonstrates the team's desire to make Vesta as widely used as possible.
- Community governance will likely foster a more engaged community and will enable the protocol to evolve over time.
- Another advantage is Vesta’s ability to onboard new collateral types. Liquity is limited to ETH, whereas Vesta will include ETH, renBTC and gOHM from inception. However, this is a double-edged sword and introduces additional risk to the protocol. This is discussed below.
Risks and Considerations
Minting and Borrowing Fees While Vesta offers interest-free lending, borrowers must pay both a VST issuance fee and redemption fee that is algorithmically adjusted depending on market conditions. This means that ‘interest-free’ Vesta borrowing could actually be more expensive in some cases than its interest-charging competitors.
Liquidation Risk Although Vesta borrowers can avail of interest-free debt and lower collateralization requirements, this can put them at greater risk of being liquidated when the market is highly volatile to the downside. This is a standard risk in DeFi lending protocols.
Vault Redemption Changes As vaults are redeemed in ascending order of collateralization, your vault may be redeemed against. If this occurs, you will not incur a loss but you will lose some of your exposure to the underlying collateral. This will also result in your collateral ratio improving after a redemption. Maintaining a high collateralization ratio is the best way to minimize the chance of being redeemed against. However, it could be argued that this reduces the value of having low collateralization requirements for higher capital efficiency.
Depositor Risk While Vesta is clearly a well-designed protocol and collateral liquidations will generally be comfortably above 100% VST debt, it remains theoretically possible that a severe flash crash or oracle failure could result in depositors losing funds.
Collateral Exposure Risk As per the protocol design, VST from the Stability Pool is used to offset undercollateralized vaults, and the collateral from the undercollateralized vault goes to the stability pool. This leaves Stability Pool depositors exposed to the price of the underlying collateral (compared to VST). This is undesirable if the depositor expects this asset to fall in value. However, depositors can withdraw the collateral received and convert it if they want to reduce their exposure to the underlying collateral.
Smart Contract Risk As with all new protocols, the code is yet to be battle-tested and smart contract risk cannot be ignored. However, the Vesta team is of high caliber, with 0xMaki as an advisor and other high-profile contributors with excellent track records. An audit is yet to be published, however, it is very likely that we will see this soon. In addition, Vesta V1 is a fork of Liquity which has proven to be resilient.
Takeaway
Vesta Finance is a promising project, offering high capital efficiency and interest-free borrowing. In addition, the project’s focus on Ethereum L2 and multi-chain demonstrates a focus on reaching as many users as possible and the ambition to become one of the largest lending protocols in DeFi. A fork of the highly successful Liquity, Vesta adds some positive key features such as community governance, additional collateral types, and multi-ecosystem ambitions. These added features might give Vesta a shot at becoming more successful than its parent - however as it is still pre-launch only time will tell.
The project was due to launch in January 2022, however, this is expected to be delayed. As of now, no date has been confirmed. Many key components are missing such as a tokenomics breakdown, emissions, and a website. However, the roster of highly influential angel investors and 0xMaki as an advisor make Vesta a very exciting project.
Vesta has stated that they will be conducting a ‘fair launch’. The method of launch is yet to be disclosed and is worth keeping an eye on. It is likely that VSTA could be a good farming opportunity at launch, which could be amplified depending on the fair launch mechanism.
