Up until now, the development of the stablecoin sector has seen the total issuance surpass 72.4 billion USD, with fiat-collateralized stablecoins occupying the majority share. According to Dune’s data, USDT’s issuance has breached 39.1 billion USD, accounting for 46.1%, while USDC’s issuance has reached 31.1 billion USD, constituting 36.6%. Together, these two account for over 80% of the total market. Although fiat-collateralized stablecoins face issues such as issuance, acceptance, and regulation, they remain the most liquid type of stablecoin.

In March this year, the collapse of Silicon Valley Bank caused a bank run, seriously impacting the US banking system and even affecting the cryptocurrency ecosystem, leading to numerous stablecoins experiencing detachment from their pegs. Among them, USDC issuer Circle revealed an exposure of 3.3 billion USD to the failed Silicon Valley Bank, leading to a panic run on the second-largest stablecoin, USDC, which at one point detached from its peg, hitting a low of 0.88 USD. Due to their use of USDC as a primary collateral asset, the largest two decentralized stablecoins, DAI and FRAX, were also affected. This chain reaction forced Circle to destroy USDC to maintain price stability and transfer the 3.3 billion USD funds from Silicon Valley Bank to BNY Mellon Bank. After adopting a series of emergency measures, the price of USDC essentially returned to 1 USD. Although the major stablecoins eventually resumed their pegs, the chain reaction caused by the SVB collapse will lead to increased regulatory scrutiny, and controls over stablecoin issuers will become more stringent.

“Over-collateralized stablecoins” are a mature issuance method currently on the market, often classified as lending projects within DeFi. As a pioneer, MakerDAO has paved the way for this subsector, and the Liquity protocol has seen rapid development since its launch. The success of DAI and LUSD as representative over-collateralized stablecoins is evident. Vesta Finance is a native over-collateralized stablecoin protocol built on the Arbitrum ecosystem, similar in product logic to Liquity and MakerDAO. This article unfolds the operating logic and interest rate model of its stablecoin, VST, elaborates on the system’s liquidation model and analyzes the protocol’s token model and current development status.

Introduction to Vesta Finance

Vesta Finance is an over-collateralized stablecoin platform built on Arbitrum and is one of the first projects incubated by the OlympusDAO community. The product officially launched in February 2022, centered on the over-collateralized stablecoin system, VST. Users can deposit supported collateral into the system, from which they can mint VST at a certain over-collateralization ratio. VST is an ERC-20 token designed through smart contracts to be pegged 1:1 with the US dollar.

Beyond its close ties with Olympus, Vesta Finance has partnered with GMX, the largest derivatives protocol by total value locked on Arbitrum. Moreover, it ingeniously combines DeFi legos and introduces more gameplay on GMX products, joining the “GLP WARs.” Moving forward, the team will further roll out the v2 version, expanding the use cases for the VST stablecoin on Arbitrum, such as adding leverage functions and liquidity mining rewards, among others.

Product Logic

Users add supported collateral to the corresponding pool to create a Vault. They can then mint the stablecoin VST at a certain over-collateralization ratio. The generation of VST implies a debt obligation. This debt causes the collateral in the Vault to be locked until the user repays the VST to reclaim their collateral.

Therefore, for users, completing a VST stablecoin loan transaction involves depositing, withdrawing, and repaying operations. Each deposit represents the independent creation of a Vault, and Vaults record user debt. The platform currently has seven types of Vaults: ETH, wETH, ARB, GMX, DPX, GLP, and gOHM.

Vesta Finance supports GLP as collateral. Users can directly deposit GLP into Vesta, and the protocol will re-collateralize the GLP in GMX. This iterative combination gameplay improves capital efficiency and increases yield rates. Users who deposit GLP can not only mint the stablecoin VST but also earn profits from the pledged GLP.

Image source：https://vestafinance.xyz/product

Interest Rate Model VRR

The goal of VST is to maintain a 1:1 anchor with the US Dollar, with the protocol ensuring a mechanism for price stability. On one hand, this stability is achieved through arbitrage, and on the other hand, through introducing the Vesta Benchmark Interest Rate Model (VRR), an index-based interest rate model.

The team, considering the risk levels associated with different collateral types, performed historical data backtesting on the interest rate levels of different collaterals. Ultimately, the premium risk was graded into different levels. The protocol divides the collateral into three risk levels: low, medium, and high. Different benchmark interest rate parameters are set for these three levels of collateral, resulting in mathematical expressions for the interest rates of collateral at different risk levels as follows:

(Here, β is the benchmark reference interest rate for similar collateral when the VST price is 1 US Dollar; C is the constant factor determining the curvature of the exponential function; ΔP is the price deviation of the VST price from the 1 US Dollar exchange rate, expressed in cents.)

The team ultimately set the benchmark reference interest rates for collateral at low, medium, and high-risk levels at 0.5%, 0.75%, and 1.25% respectively, resulting in the following interest rate curve:

Image source：https://docs.vestafinance.xyz/technical-overview/fees-and-vesta-reference-rate/vesta-reference-rate

Liquidation Model

The protocol introduces two methods to update the real-time price of collateral assets: Chainlink oracles and the 1,800-second weighted average price of corresponding assets on Uniswap v3. If the value of the collateral in the account falls below the minimum collateral rate, liquidation will be triggered.

The protocol has constructed a Stability Pool composed entirely of VST stablecoins. This pool serves as the first line of defense to initiate the liquidation mechanism, and the liquidation principle followed is “Stability Pool first, remaining debt reallocation.”

Anyone can deposit VST into the Stability Pool and receive VSTA token rewards (the community treasury address determines this portion of the reward) as well as part of the collateral rewards from liquidated Vaults. Users can withdraw their deposited VST at any time. In addition to Vaults being liquidated, when liquidation occurs, the Stability Pool will first destroy the corresponding VST debt within the Vault and obtain the collateral within. 0.5% of the collateral will be rewarded to the liquidator, with the remaining collateral distributed proportionately to VST depositors. Suppose the entire VST in the Stability Pool is insufficient. In that case, the system will redistribute the debt, automatically adding the remaining debt and collateral to other Vaults in the same liquidation state, and allocating them according to the collateral’s proportion of the system’s total amount. This means that Vaults with a higher total collateral value will be prioritized in the distribution.

The protocol launched a savings module on February 6th of this year to attract VST deposits. The deposits absorbed by this module will function as a reserve stability pool, and the deposit interest rate corresponds to the VRR model, so the level of interest mainly depends on the size of VST’s deviation from its peg. This module supports a maximum lock-up period of 90 days, with longer lock-up times earning higher VST rewards. The auto-lock feature is designed to prevent massive withdrawals of VST.

Image source：https://vestafinance.xyz/staking/saving

Stable pools can better ensure the system’s ability to pay, guaranteeing that liquidation actions occur promptly. If the size of the stable pool is greater than the liquidation scale of the Vault, it will be able to absorb system debt effectively. Therefore, stable pools play a vital role in the system’s liquidation capability.

Token Model

The total supply of VSTA tokens is 100 million, with the majority of the allocation going to the community to incentivize active governance. 1% is allocated to OlympusDAO. The detailed token distribution is as follows:

Image source:https://docs.vestafinance.xyz/tokenomics/vsta-tokenomics

Community Treasury (63%): Of this, 61% is used for mining incentives, including the VSTA-ETH pool on Balancer (currently releasing 11,446 VSTA weekly), Factor Pool on Curve, and the official Stability Pool (currently releasing 284 VSTA weekly in the gOHM Vault); 2% is used for the grant committee created by the team, to incentivize community members to complete marketing and technical tasks.

Core Contributors (21%): Out of this, 10% has been allocated to current core team members; 11% will be distributed to future contributors, ensuring benefits for the future development team.

Advisors (4%): Currently, according to information disclosed by the team, there are three advisors, and over one-third of this portion of the tokens has yet to be allocated.

Treasury Boosting event—LBP (4%): This part is the treasury’s starting fund, and from January 21, 2022, to February 3, 2022, the team used approximately 10.08 million USDC to issue 4.12 million VSTA, at an average price of 1 VSTA = 2.45 USDC.

Whitelist Contributors (1%): From December 2021 to January 15, 2022, the team conducted a low-price token sale for early supporters in the community. The original plan was to allocate 2% of the total supply to this portion, but at the end of the event, 1% of the tokens were distributed to members in the whitelist, about 600 people. Based on their contribution levels, these 600 people were divided into five tiers, with the VSTA token price for this event being approximately $0.375 each.

Development Status

During the USDC de-pegging incident, due to the decline in collateral prices and the fact that nearly 50% of the GLP assets included USDC, some positions were insufficient to cover debts. As a result, the protocol liquidated 10 CDPs, and nearly $42,000 worth of VST was destroyed. The protocol withstood the stress test by utilizing the funds from the stability pool and savings module, using its capital. Officials stated that the main liquidations occurred in the GLP Vault, with a liquidation penalty of 15%.

Currently, the total locked value in Vesta Finance’s liquidity pools has surpassed $17 million. Looking at the composition of the collateral, more than $9.75 million of it is in gOHM assets, accounting for as much as 55.39%, indicating a high dependency on gOHM assets.

Image Source: https://vestafinance.xyz/stats

Regarding VST’s issuance, the system has minted over 14.2 million VST tokens so far. Examining the distribution of the collateral assets, gOHM makes up a substantial amount of the collateral used for minting VST. GLP’s share has been relatively high in the past, exceeding 80%, but it has recently decreased. Meanwhile, among the collateral assets for the destroyed VST, most of them come from the GLP Vault, indicating its higher volatility, followed by the gOHM Vault. It’s clear to see that the protocol has a strong reliance on both gOHM and GLP.

Image source：https://dune.com/defimochi/vesta-finance

Conclusion

The protocol demonstrates logical consistency in product design and is similar to standard over-collateralized stablecoin protocols. It maintains the price anchor of the VST stablecoin by dynamically adjusting the borrowing interest rate (VRR) and employs a tiered liquidation mechanism. The stability pool and savings module serve as the first line of defense in the liquidation system, withstanding the stress test during the USDC de-pegging incident. The airdrop incentives on Arbitrum and the combined gameplay with GMX have brought some capital and users to Vesta Finance. However, the current application scenarios for VST stablecoin are limited. In the future, as over-collateralized stablecoin protocol ecosystems expand to Arbitrum, it may further squeeze the market share. Vesta Finance’s development space will face challenges, and the protocol needs to find breakthroughs.