Delegated Vaults Explained

Andre Cronje
Aug 4, 2020 · 4 min read

Before the launch of the first delegated vault, we want to first explain a few concepts. (Disclaimers at the end so they make more sense)

Concept

The concept behind a delegated vault is simple.

Step 1. Provide liquidity. From the votes currently on YIP 33 it seems clear the first vault will be LINK. An LP deposits LINK into the vault and receives yLINK.

Step 2. Use liquidity as collateral. LINK is deposited into Aave and activated to be used as collateral.

Step 3. Borrow stable coins (technically step 2.5 is collateral management to ensure the vault remains safe, we will explain that lower down). The current highest yielding strategy is the USDC yVaults. So we borrow USDC.

Step 4. Put the USDC to work. The USDC is deposited into yVault, which has been averaging above ~20% APY.

Step 5. Any USDC earned above the debt is sold for LINK and returned to the vault. Increasing yield in LINK (or aLINK specifically).

Analysis

The above is a straight forward process that anyone can do manually, however, there are a few benefits to using a pooling strategy.;

  • Save on gas costs (only need to pay for the deposit/withdraw ~$2-$3)
  • Rebalance for health factor 4 on every interaction
  • If anyone withdraws, rebalances, or triggers earning, then the system rebalances. This ensures that the vault overall is protected by the interaction of all its LPs.
  • The vault is monitored by our yliquidate (Aave liquidation) system, and instead of liquidating rebalances.
  • The vault will continue to optimize for the highest yield stable coin strategy continuously. At time of writing anything between ~10%-95%

The last interaction, I find most fascinating;

  • The vault becomes a LONG whale with enough LINK capital. Consider the vault has $1m worth of LINK, which at health factor 4 (assuming 100% LTV) is $250k worth of USDC, earning ~20% APY. That’s $136 worth of LINK purchased off the market, every day. Aave currently has $106M worth of LINK, if that migrates to the vault, it would translate to $14,520 worth of LINK purchased off the market, every day.

Collateral Management

The following is fairly technical, and not required to interact with the vaults, but would like to explain it;

For a given account, Aave measures collateral in ETH, so we have two important variables; _totalBorrowsETH (total amount of borrowed assets measured in ETH), and _availableBorrowsETH (given the collateral, how much is still available to borrow).

By adding _totalBorrowsETH and _availableBorrowsETH we arrive at the maximum borrow limit. This divided by 4 is our safe maximum. We don’t want to go over this number. If this maximum is greater than the total borrowed, we can borrow more, the amount we can borrow is max-borrowed.

For borrowing, we adjust this number by 95%, for repaying, we adjust this number to 105% (so we operate within a band instead of constantly jumping between borrow > repay > borrow > repay).

So as an example above, if we rebalanced, we would only rebalance if maxSafe was less than 118.75 ETH, and we would only borrow more if maxSafe was more than 131.25 ETH.

This interaction is constantly happening and this allows the vault to maintain its health factor on interaction.

Risks

While the LINK deposited can’t decrease, the debt can increase. If a strategy does not manage to outperform the debt, then a portion of LINK will be impermanently locked. If a strategy then outperforms the debt again, this LINK will become unlocked. This is important to keep in consideration.

As a protection mechanism, 0.5% of deposits will be used as an insurance fund. At a health factor of 4, this allows a -2% deviation between accruing debt vs accruing interest. This is simply an additional safety measure, should the strategy not outperform the debt.

If debt is paid back by a performing strategy, this insurance is returned and the full value can be unlocked.

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