Introducing Vesta Reference Rate
In the last few weeks, we have seen a slight de-peg of VST due to onboarding of popular collaterals, which led to numerous redemptions.
The redemption function was intended as the main mechanism to defend peg by allowing holders of VST tokens, including those who have purchased VST in a secondary market, to redeem the stablecoin for the underlying collateral, even though they are not the primary borrowers. The user experience is extremely bad for the redeemed users as healthy vaults were being redeemed against.
Following your feedback, Vesta core contributors look to completely disables redemption and implement Vesta Reference Rate. Read below on how Vesta could disable redemption.
Vesta Reference Rate (VRR) Model
How will VST remain pegged if there is no more redemption mechanism? As with any tokens, the peg can be maintained via regulating supply and increasing demand. We are tackling the supply part first via Vesta Reference Rate (VRR) Model — a mechanism to replace the current redemption model as a price stabilizing framework.
With this new mechanism, users will no longer be able to redeem VST against the collateral of other vault owners. Users will no longer pay a mint fee upfront when minting/borrowing VST, but rather pay a continuously compounded fee based on the VRR. Later on, we will introduce the Vesta Safety Vault, read on to learn more.
The effective rate paid will be determined by two factors: the baseline VRR and the collateral-specific premium rate.
Baseline Vesta Reference Rate
The baseline Vesta Reference Rate will be driven by the dynamics of supply and demand forces of VST around the peg. When VST is below peg (i.e. too much VST supply in the market), a higher VRR is charged to borrowers to incentivize them to repay their loans. These incentives will motivate users to purchase VST in the open market, thus driving the price upward towards the peg.
In order to account for collateral-specific risks, a premium depending on the collateralized asset will be added to VRR to compute the effective interest rate. Vesta will categorize collaterals into three risk groups labelled as low, medium, and high (as recommended by Risk DAO here, please turn on Pro View and check the Qualitative Analysis section), where the maximum collateral-specific premiums will be 0%, 1%, and 3%, respectively, and the minimum collateral-specific premiums will be 0%, 0.25%, and 0.75%, respectively. These rates are subject to governance votes.
The effective interest rate (EIR) charged to borrowers will include the baseline VRR plus the collateral-specific premium rate, such that:
The effective interest rate curves for the three categories of collaterals will look as follows.
Where will this revenue go?
In the very near future, we will introduce the Vesta Safety Vault, where a portion of the VRR that is paid by borrowers will be given as a reward to depositors in the Vesta Safety Vault. In short, this will be a place for people to deposit VST for a yield, playing an instrumental part in Vesta’s monetary balancing.
To learn more about Vesta Reference Rate’s motivation, technical framework and empirical reasoning, please visit our Request-for-Comment (RFC) proposal on Vesta’s governance forum — Curia: https://curia.vestafinance.xyz/t/introducing-the-vesta-reference-rate/137
We believe that VRR will play an instrumental role in improving Vesta’s user experience and making Vesta the go-to stablecoin of crypto. Thank you all for being here to support Vesta. We look forward to seeing your comments in our proposal.