The Vader Protocol (pt. 2) — Anchors & Stability
“If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.”
― Henry David Thoreau
In 27 A.D., one of the worst structural collapses in history took place. Atilius, a former slave turned entrepreneur, sought to make a fortune by building an amphitheatre as cheaply and quickly as possible. Urging his builders to favor speed over safety, he rushed the construction of his amphitheatre. On the opening day, his gladiator show brought in tens of thousands of spectators. Unfortunately, the building was poorly constructed with a poor foundation. With so many people packed in, the building collapsed, leading to the death of an estimated 20,000 people.
Foundations are important. Failure to plan properly can lead to catastrophic results.
Last time we explored stablecoins, an essential foundation of the Vader Protocol — what are they and how do they work? We saw how stablecoins act as a store of value (value is not easily lost) and as a medium of exchange (you can use them to exchange assets with clear and recognizable pricing).
Having an effective stablecoin allows an economy to run smoothly. People can store value with reduced risk and transact assets more easily.
This stability makes sense with something like USDC where each USDC minted has a dollar backing it. But what about something decentralized like USDV? With something decentralized, you’ll still want to maintain the peg (store of value) and ensure it easily traded among different assets with high liquidity (efficient medium of exchange).
Without these two qualities of stability and high liquidity, the lofty goals of the Vader Protocol have no stable foundation to build upon. An economy cannot run on a currency that drastically changes value. Neither can an economy run on a currency that isn’t available or limited for use.
With this in mind, we’ll want to explore these two questions:
- Pricing — how does USDV reliably maintain its stability as a decentralized asset?
- Liquidity — how does USDV effectively incentivize liquidity?
For those unfamiliar, “liquidity”, in finance, refers to the ability to turn something into cash. Liquidity can be considered a relationship between an asset’s price and the ability to sell it quickly. If you have low liquidity, this means you likely cannot sell something quickly without a large effect on price. High liquidity means you can sell something quickly with a small effect on price.
In this article, we will explore pricing and stability.
Pricing — how does USDV maintain a stable, reliable value?
Last time we discussed how cryptocurrencies don’t just price themselves. They need some source of pricing. Some use oracles take real world data and put it onto the blockchain. Dai uses a medianizer to take the median of multiple price feeds (something that gives you a price valuation) to keep its value close to $1. By using multiple different price feeds, it’s less open to manipulation (imagine if you priced based on one price feed. If that price feed is manipulated, all your pricing will be manipulated).
The Vader Protocol similarly uses multiple pricing sources, but instead of outside price feeds, it uses anchors in the form of its own liquidity pools.
Liquidity pools, as described here, are essentially two different assets which are paired for buys and sells based on the algorithm used. You might be familiar with Uniswap or Sushiswap pools which have one asset paired with another. This allows you to swap one asset for another with the price is based on the ratio of the assets.
The Vader Protocol consists of two types of liquidity pools linked by VADER and USDV:
- “Anchor pools” used to maintain a stable and accurate pricing
- “Asset pools” used to provide liquidity for a variety of assets
Anchor Pools (stability):
Anchor pools are the heart of the Vader protocol. They will start as five pools used to maintain/“anchor” a stable price. All anchor pools will have VADER as the base asset paired with either DAI, USDT, USDC, BUSD, or UST.
Anchor pools can be replaced based on three criteria based on accuracy of pricing and depth of the pool (see whitepaper for specifics).
The purpose of anchor pools is to maintain a stable price feed for VADER and back it with their purchasing power. The value of VADER is determined by the median price of the anchor pools.
According to the whitepaper, VADER is used to “sense” the purchasing power of the group of stablecoins (think of it as an amount that can be reliably bought by an average anchor pool). Market conditions should ensure all five pools stay close in price (if VADER is overpriced in one pool, there’s incentive to sell VADER into that pool and vice versa until prices match).
Having multiple anchor pools helps provide redundancy in case one pool is manipulated or thrown off by something.
The Link between Anchor & Asset Pools: VADER & USDV
Anchor pools and asset pools are linked by VADER and USDV. You mint (create) USDV by burning VADER. You may also mint VADER by burning USDV.
- VADER is priced in USDV by the inverse of the median of the anchor pools
- USDV is priced by the median of the anchor pools.
- Median price of VADER is $100 according to the anchor pools
- You may burn 100 USDV to mint 1 VADER (1 USDV = 1/100 VADER)
- Or, you may burn 1 VADER to mint 100 USDV (1 VADER = 100 USDV)
There is zero slippage for USDV <-> VADER swaps. This ensures you get exactly what you pay for (aside from gas fees).
Using this system, USDV is backed by the stability of the purchasing power of the anchored pools and pegged to $1 to create clearly priced asset pools with stable pairings. (We’ll go into more detail on the mechanics and their rationales in future articles.)
Asset Pools (liquidity for other assets):
Unlike anchor pools which use VADER as a base asset, asset pools use USDV as a base asset. You can have all sorts of assets paired with USDV, similar to creating pools in Uniswap, Sushiswap, or Bancor. These pools will be curated based on their depth of liquidity and may start off with a limited number of pools. This number may also increase later on based on governance.
By pairing each asset with USDV, pricing is clear and you can use USDV for all asset swaps as an efficient medium of exchange (instead of hopping through or having to hold onto different more volatile assets).
In the past, there have been hacks via flash loan attacks where someone with a lot of capital borrowed a lot of capital, used it to manipulate a price, and used that modified price to get more before paying back that loan, all in one block of transactions.
As Strictly-Scarce (dev behind Vether and the Vader Protocol) describes it, without a mechanism in place, someone can use a flash loan to lower the price of the anchor, mint USDV, bring the price of the anchor back up, and burn USDV to mint VADER, inflating the VADER supply, all in one block.
Because flash loans are conducted in one block, the Vader Protocol only allows the same user to choose one of the two actions (converting or minting USDV) per block. You can’t complete both actions in the same block. This helps protect against this attack vector.
Not only that, the Vader Protocol also has slip-based fees.
As described in previous articles, the Vader Protocol uses slip-based swap fees as developed by THORChain (see previous articles on fixed vs. slip fees, and a demonstration of the difference between fixed and slip fees). This is different from the fixed swap fees of Uniswap and Sushiswap.
With slip-based fees, the purchaser pays a fee based on the slippage which is proportional to the liquidity (less liquidity = more slippage). As such, it’s sometimes more favorable to make multiple smaller swaps rather than one large swap. This makes it much more costly to manipulate prices in one movement and also provides greater fee returns to liquidity providers (one of many incentives which we’ll discuss in the next article). Manipulating the prices in a large scale means paying out large fees proportional to the impact of the change.
Many protocols go the way of Atilius, desiring quick money over sound construction. Unlike those protocols, the Vader Protocol is being built with stability in mind.
Stability is one of the key elements to a successful economic ecosystem. The Vader Protocol works to give stability to USDV and its ecosystem through the use of anchor pools, unidirectional redemption/minting within a block by the same user, and slip-based fees.
In the next article, we will see how the Vader Protocol incentivizes liquidity through not only slip-based fees, but also impermanent loss protection, and dividends.
As usual, if I’ve missed or misrepresented something please comment below and I’ll be happy to go back to review and correct as needed. Everything is based on my own research and understanding. I am not the dev, but someone who enjoys sharing what I’m learning.
Have questions or thoughts on potential vulnerabilities? Help us build a stronger foundation with your curiosity and insight. Join our Discord channel and ask the hard questions (or even ask the obvious questions!). Nothing we make is perfect, but with community input we can make it stronger and more resilient for the future.
Also, here are a few sources I found interesting during my research. Feel free to read up on more or go on a Google adventure yourself:
Want to get VADER? In the future, VADER will be available for holders of Vether (VETH) by burning it 1 VETH for 1000 VADER.
The above article references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.