Motivation

In this proposal, we present the Vesta Reference Rate to replace the redemptions feature on the protocol.

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.

While this effectively improves the collateralization ratios of vaults that are close to being liquidated, it essentially alters the borrowers portfolio by enforcing the liquidation of their collateral even though they satisfy the minimum collateralization ratio (MCR) requirement. Hence, redemptions impact the borrowers in the system by changing their balances, adding uncertainty and severely undermining user experience, as this defeats the purpose of allowing borrowers to maintain an intact exposure on the collateral asset should they meet the protocol’s borrowing requirements.

We have already taken steps to mitigate the impact of redemptions on the system. Previously, the redemption fee was at 0.5%. As Vesta onboarded more collaterals, lots of users started utilizing Vesta as a platform for leverage, effectively repeating the process of taking out loans and then selling the loans to acquire the collateral again. While such an activity bootstrapped a sizeable portion VST origination, it also puts VST under severe selling pressure, pushing VST below the peg. Since then, we have changed the redemption fee to 2%, making redemptions unprofitable unless VST goes below $0.98. However, this was only meant as a temporary solution as it now effectively puts VST at a peg of $0.98. We are now proposing novel developments to bring VST back to peg: Vesta Reference Rate.

Vesta Reference Rate

Technical Framework

We introduce the Vesta Reference Rate (VRR) as a mechanism to replace the current redemption model as a price stabilizing framework.

As part of this new proposal:

• Users will no longer be able to redeem VST against the collateral of other vault owners.
• Users will no longer pay a front-end mint fee when minting/borrowing VST, but rather pay a continuously compounded fee based on the VRR.
• Changes in the baseline VRR will be driven by the dynamics of supply and demand forces of VST around the peg.
• When VST is below the peg (i.e. too much VST supply in the market), a higher VRR is charged to borrowers to incentivize them to repay their loans, while also prompting users to deposit VST in the Vesta Safety Vault to earn the higher VRR. * These incentives will motivate users to purchase VST in the open market, thus driving the price upward towards the peg.
• When VST is above the peg (i.e. too much VST demand in the market), a lower VRR is charged to borrowers to incentivize them to borrow more. These incentives should motivate users to sell VST in the open market, thus driving the price down toward the peg.

The Vesta Reference Rate Model

• We have looked at other crypto markets and financial products in order to determine what would be a simple and efficient way to make the Effective Interest Rate (EIR) more reflective of market conditions, as well as the state of VST.

• As a result, we are proposing an exponential function for the EIR, which results in exponentially higher interest rates as the price of VST falls further and further.

• Specifically, we fit the exponential functions for the low-risk, medium-risk, and high-risk collaterals by defining two point coordinates (X,Y) for each EIR function; we define the EIRs at the -5% price de-peg and when the price is at the peg (i.e. equilibrium EIR for the collateral).

For detailed explanation of the equations, please view this post in the original discussion.

These models will be calculated over the range of [-5%, 5%] price-peg ratio, and as such, the EIR models will have a maximum cap that equals the interest rate at the -5% price/peg ratio, and a minimum cap that equals the interest rate at the +5% price/peg ratio.

The resulting models will look like this:

• While these rates may seem extreme for cases where the price of VST is below the peg by ~5%, it is rare for a collateralized stablecoin to de-peg by more than 2% as our empirical analysis has shown. In addition, these numbers are in line with what is observed for the funding rate in perpetual futures markets.

• Moreover, we aim to use a portion of these rates in our Vesta Safety Vault program, thus incentivizing users to buy VST in the open market, thus driving the price back to peg and towards the equilibrium EIRs.

Recommendation

Implement VRR and cancel redemption.

Implementation

Upon passing of this proposal, the recommended course of action would be implemented immediately.

To learn more, please visit our discussion in the link attached.