Welcome Anon! Today we are going to go through one of the incoming lego pegs of the DeFi growth on Arbitrum. If you’re not well versed with lending, read the previous article that covers lending here.
As the layer two revolution grows exponentially there is a need for a decentralized stablecoin and lending protocol that can power the system. This is where Vesta Finance comes in with a decentralized overcollateralized stablecoin. It is the first Arbitrum native decentralized lending protocol and is growing quickly. It is overcollateralized in comparison to many other stablecoin projects that are undercollatoralized instead (such as UST although they are moving to being backed by BTC). The concept of overcollateralization and undercollateralization might confuse some so the previous article got you covered. In essence, there are more than 1$ worth of assets for every stablecoin making it very strongly backed.
Why is this important? It makes the protocol robust enough to enable low minimum collateral requirements in order to lend the stablecoin. This allows for more capital efficiency and unlocks more value. With that said, let’s deep dive into the protocol.
So What is Vesta Finance?
Essentially, it is a lending protocol that enables you to lend up to 90,9% of the collateral due to the fact that the protocol has a 110% minimum collateralization ratio. This means that if the collateral amounts to $100 you can take a loan against it up to $90.9.
The advantage Vesta has over other competitors is its first mover advantage on Arbitrum in comparison to other decentralized stablecoins. Being able to capture value as the Arbitrum ecosystem is still in its infancy and grows puts the protocol in a pole position to capitalize. Not to add that less fees are incurred on the participants in comparison to the Ethereum mainnet as well. The protocol has so far acquired a TVL of $57.4M and a market cap of $5.6M. Basically, it has a market cap/TVL ratio of roughly 0.1.
However, it is not simply a lending protocol that enables you to use your assets as collateral. As a user you also have the possibility of getting paid by liquidating others. This is done by acquiring VST and staking it in a stability pool. How does these stability pools work?
Stability Pools
The stability pools purpose is to guarantee the health of the protocol and absorb the debt of liquidated users. Considering the “risk” people take from depositing VST into the stability pools, they are rewarded with the liquidated collateral distributed to stakers. While you are staking VST in the stability pool you are earning an additional APR that differs depending on what asset you are staking. Ranging from 8.24% → 9.56% → 11.02% for ETH, BTC, and gOHM respectively at the time of writing. This APR is earned in VSTA tokens where the rewards come from the community treasury.
Moreover, the minimum collateralization ratio of the protocol stands at 110%. This means that if you commit to the stability pools and liquidate other users, you are bound to profit since they are liquidated at a value above the collateral. This is important to point out as every liquidation that occurs will empty a portion of the stability pool. The same portion will be emptied from your deposit.
Example: If you deposit $100 of VST and the protocol liquidates borrowers that will empty 10% of the stability pool. You will have $90 of the deposited VST left in the stability pool.
However, the liquidated collateral is distributed at the same rate to the participants in the stability pool. This means that they make a profit due to the collateralization ratio.
Incentivizing Liquidity
Being an early adopter of protocols has its perk. Vesta Finance’s liquidity mining is set up to incentivize liquidity protocol is a testament to this.
If there is something that is the be-all and end-all of stablecoins, it is liquidity. The more liquidity you have, the less price sensitive the coin is to large volume. This is why Vesta is incentivizing deep liquidity by entering a partnership with Frax to co-incentivize a liquidity pool at Curve (I will not go through Curve in this article, because even my wife’s boyfriend know about the Curve Wars at this stage). The FRAX-VST pool on curve is one of the deepest liquidity pools on Curve’s Arbitrum deployment. It gives you a base APR of 9% and max APR of 22% depending on how long you lock in your stake. Not a bad opportunity during these volatile times.
The idea behind this is to aim for consistent growth over time in VST supply and utility. I doubt it comes to any surprise that stablecoins are fundamental to balance AMM pools. When people want a safer asset to hold as they are in profit on other tokens, the stablecoin demand increases substantially. Considering Arbitrum is still at an early stage, this allows Vesta to capture a lot of value if they can incentivize liquidity successfully.
The other option would be to enter a liquidity pool consisting of the governance token VSTA and ETH and earn 37% APR in VSTA and 25% in Balancer. In order to do this you need to get the LP token on Balancer and then deposit it on Vesta. This comes with higher risk than the previous option considering there are two volatile assets in the liquidity pool, hence the risk of impermanent loss.
Team
The Vesta Finance team is a pseudo-anonymous team that was put together by gigabrain 0xMaki. The co-founders are I.O.W Mikey and 0xAtum and they are being strategically advised by DCF God and Not3Lau Capital. However, they had a funding round that acquired additional support.
Angel round and supporters
The round’s participants include: Tetranode, DCFGod, Fiskantes, Not3Lau Capital, Sam Kazemian, 0xmons, Wangarian, OmniscientAsian, PopcornKirby, Nick Chong, Calvin Chu, Jae Chung, Anthony Sassano, Eric Conner, Mariano Conti, Shuyao Kong, Feir, and many more.
More about the vesting will be covered below.
TL;DR: the coins will be vested under the same terms as the contributors for strategical alignment.
Tokenomics
VSTA
Vesta Finance is a two token protocol that consists of the governance token VSTA and the stablecoin VST. The total supply of the VSTA token will be 100 million. The following distribution of the supply is as follows:
Out of the current total supply, only 5 million of the VSTA tokens are in circulation. The reason behind this was recently clarified by the Vesta team in a recent Twitter post that outlines that they want to keep a large community treasury to build the protocol further. This would involve contributor programs, grants, and DAO alignments (one of these collaborations involves Redacted that will deposit their gOHM into Vesta).
In regards to the people that got early access to the token such core team, contributors, and advisors along with strategic partners, the tokens are vested linearly over two years with a six month cliff (cliff means that you get fully vested after a specific time/date).
Considering Vesta is a similar protocol to LQTY (Liquity which is an interest rate free lending protocol on the Ethereum mainnet) 2% of the supply will be available to the LQTY stakers. However, more information regarding this will be provided. The idea behind is because the LQTY team have been co-operating with the Vesta team along with advisory. This airdrop will be vested over the long-term to align incentives between the two communities.
The VSTA token gives you governance rights over the protocol as well. These rights will let you vote on interest rates, minting fee rate, and new collateral types. This will take place on Snapshot which is the industry standard at this point. As the protocol plans to become more decentralized over time, the protocol have allocated more than 50% of the supply to the community treasury. This is a work in progress as the development team are trying to build solid foundation that the community can capitalize on in the long term.
VST
The other token is VST which is the stablecoin. It is minted by either depositing collateral or acquiring it directly on decentralized protocols such as Balancer. The question that normally arises when projects issue stablecoins is how it will keep it peg.
The stablecoin is collateralized by locked Ether that has a dollar value that exceeds the value of the issued stablecoins.
Users can always swap the dollars worth of their underlying collateral minus the fees (makes it profitable for the protocol).
The protocol also algorithmically controls the how VST is issued by taking a variable issuance fee into consideration.
The participants can always redeem their VST back to their underlying collateral while paying a redemption fee.
These redemption fees makes sure the VST stablecoin gets intrinsically backed and maintains a price floor of $1. With these standard parameters taken into consideration, there are some scenarios where you are not able to redeem your VST. This brings us to recovery mode.
Recovery Mode
Recovery is a state that kicks in when the total collateralization ratio falls below the critical collateralization ratio for the deposited asset. During this phase the protocol blocks borrower transactions that could lead to a further decrease in collateralization and amplify the critical state in recovery mode. It pushes the user to behave in a way guide the system away from recovery mode.
Can only take out a loan that has a higher collateralization ratio than the current state of the recovery mode.
Encourages collateral top-ups and debt repayment
Liquidation conditions are relaxed
The protocol have not been in recovery mode yet since the possibility of it becomes a self-fulfilling prophecy that avoid it happening. However, it would be interesting to see how things would develop when it happens (I will follow it and update this post accordingly in that scenario).
How to acquire VSTA and VST
The classical approach would be following:
VSTA
Add Arbitrum to your Metamask wallet (can be done on SushiSwap).
Go to the official Arbitrum bridge or other bridges like Hop Protocol, Synapse etc. and bridge Ethereum to Layer 2.
Convert your Ethereum to $VSTA on Balancer but leave enough to pay gas fees.’
VST
For VST skip step 3 above. Then you have to buy FRAX first on SushiSwap (or GMX so make sure you compare the best rates)
Go to Curve Finance and swap FRAX for VST.
Remember, if you want to pay less gas fees there are no requirement to bridge assets from the Ethereum mainnet, which is why I mentioned other bridges. If you have assets on other blockchains that you want to move to Arbitrum, that works as well.
Risks
Main risk that I have identified are the unlocks worth paying attention to. Nobody likes getting dumped on even though it is a part of the game. If you want to minimize the risk, stay viligant when the unlocks are bound to take place. However, due to a vesting schedule the risk is not as high here compared to other protocols. This is why it is important to have an Angel round with people that have some skin in the game, which has been the case for Vesta. Doing it with web2 VC’s is just asking to be dumped on (just look at the coins in the Solana Ecosystem). Also, Vesta Finance is based on Liquity which is robust protocol and well-audited. However, they are not identical and changes have been made to the contract. One audit have taken place with 1 more planned for Q3 2022, 10 minor issues were found which have been highlighted by Crypto risk assessments. Supporting different collateral types naturally entails more smart contract risk. Although it is a risk worth taking.
Personal Thoughts
Vesta is an interesting protocol that is betting on capturing value on Arbitrum through its first mover advantage. If Arbitrum keeps growing over time and other competitors does not dilute the market then it could turn out to be a successful strategy. The protocol have plans to expand to other L2’s and become cross-chain on L2’s such as Metis and zkSync. This would enable added value capture for Vesta. However, there are some concerns as well. After the initial hype when it was released, there have been a stark decline in user activity of the protocol. While this can be credited to Arbitrum not being mainstream yet, crypto is all about network effects and this is a current weakness that will play a big part in the long term prospects of the protocol.
Momentum have significantly slowed down and how the team deals with this will be seen with time. Also, it is a similar protocol to Liquity which is deemed an “underrated” protocol for the amount of users they have, despite a great product. Vesta is facing the challenge of not going down a similar fate. Nonetheless, being able to loan up to 90,9% of your collateral is a welcome change in the business of overcollateralized DeFi loans.
Lastly, there are tons of projects in the market that have stablecoins, diluting liquidity with one another. From a strategical standpoint it’s understandable since you are able to internalize fees. However, the market indicates that users want to hold trusted stablecoins. Although in this case it does makes sense for the protocol as people want a stable asset to receive when they take out a loan. Nevertheless, there is a chance that we reach a point where talented teams put their minds together and decide to merge instead.
Author’s Words
I want to clarify that even though I am a finance professional, this is not financial advice, and this article is only meant to bring light to the current market situation. I advise everybody to do their own research, I only want to help you to find what you are looking for. If you enjoyed this piece, feel free to share it and subscribe.