Sirwin
Sirwin

Vesta Finance — Borrow from yourself at 0%


Primer — Essentially, it enables users to hold their crypto while still extracting its value through juicy yields and interest-free loans. Vesta charges a one-time fee to mint VST and create a fully customized vault. Vaults represent individual collateralized debt positions and enable users to obtain liquidity on their cryptocurrency.

Crypto assets to borrow against include renBTC, ETH gOHM, GMX, GLP, and DPX.


Introduction

DeFi represents an ecosystem of blockchain-based applications (dApps) offering a range of financial services similar to those provided by traditional banks for fiat money.

In today’s article, we shall be covering an offering that has no parallel in the world of traditional banks, i.e., zero-interest loans.

Let’s understand the importance of 0% interest lending with the help of an example.

You are a small-time business owner bullish on ETH. You have ETH sitting in your wallet. The underlying value of ETH may increase or decrease (in the short term). Still, you’re not getting anything out of it currently. And your business is in dire need of cash, so what do you do? Do you sell your ETH? Despite knowing the prices are going to soar in the future? Na-ah!

This is where crypto lending comes to the rescue. You can deposit (ETH as collateral) into platforms such as Vesta to take out an interest-free stablecoin (VST) loan. VST can be easily swapped for fiat or other stablecoins. Taking this route will enable you to keep your business afloat without missing out on future gains from hodling ETH.

In summary,

  • In the event of an emergency, you get to borrow fiat money (using crypto assets as collateral) without selling the asset (ETH) you’re bullish on. So users can preserve the long-term upside of the asset while enjoying the liquidity of their asset in the short term.

  • Crypto loans are instant and require no credit check, unlike traditional loans.

  • Vesta offers loans at 0% interest.

  • Borrowers have to over-collateralize the loan to protect against price fluctuations.

Vesta Finance

Vesta Finance is an Arbitrum-native stablecoin protocol that enables users to generate VST by locking their assets as collateral. It offers interest-free loans, a wide range of collateral compared to its competitors, and lower gas fees by being on Arbitrum.

Additionally, Vesta boasts a super-ambitious roadmap.

At the time of writing, more than $50 billion is locked up in DeFi, more than half of which comes from Ethereum ($30 billion). Vesta aims to make DeFi accessible to all by extending its offering to non-EVM ecosystems in addition to all EVM-compatible chains.

Vesta has two tokens.

  • VST is the USD-pegged stablecoin, in which loans are given and repaid.

  • VSTA is the governance token that plays a key role in the protocol’s decentralization.

How does Vesta Work?

Users supply crypto assets (accepted assets include ETH, renBTC, gOHM, GMX, GLP, and DPX) into a vault to take out a loan. Critical to this concept is the VST (native stablecoin). Vesta enables users to take out VST loans against the assets mentioned above. A minimum of 110% collateral coverage ratio is mandatory. (Protocol parameters)

Collateralization is vital as it protects in the event of a default. In DeFi, collateralization forms valuable insurance and is essential for a protocol to be fully trustless. Vesta’s collateralization ratio is lower than that of its competitors.

Anyone can open a Vault to mint VST by locking collateral and ensuring the ratio of collateral value to VST minted is the required minimum. And, if the collateral value falls below the set threshold, the vault is liquidated automatically.

Thus, Vesta offers

  • Ability to retain assets and still be able to spend their value

  • Instant loans at 0% interest

  • Opportunity to leverage position

Why open a Vault?

Apart from the 0% interest borrowing & instant access to loans sans credit checks, opening a vault has several additional benefits outlined below -

Leverage Opening a vault enables individuals to use the newly minted VST to purchase more collateral. Leverage allows users to increase exposure to a given asset. It is essential to exercise caution when leveraging a position because while there is immense potential for gains, there is also the risk of loss.

An example, Our friend Alice has 5 ETH (the value of 1 ETH is $1000). Alice deposits 5 ETH ($5000) into the vault to mint VST at a collateral ratio of 150% to borrow 3300 VST. Alice can use the borrowed 3300 VST to leverage her position.

In this scenario, all the borrowed VST is used to buy ETH and deposited back into Vesta. She swaps 3300 VST for 3.3 ETH and deposits it into Vesta to borrow more VST. She can repeat the process multiple times to increase the leverage.

By doing this, Alice gets more exposure to ETH & there is an opportunity to make amplified gains if the market moves as per her belief. However, the risks of falling ETH prices are also amplified. If Alice does not keep her vault adequately collateralized, it will be liquidated.

As of now, users have to leverage their positions manually as Vesta is yet to offer an auto leverage option. However, a UI for auto-leveraging (similar to Abracadabra’s borrowing MIM against an interest-bearing asset and looping it) is in the works.

Obtain Liquidity without Selling Assets Opening a vault allows users to spend the value of their assets without exiting their long position. VST is a stablecoin that can be converted to fiat or other stablecoins. The money generated can be used to pay off traditional high-interest debt.

An example, Alice deposits GLP worth $5000 into the GLP vault to mint VST at a collateral ratio of 150% to borrow 3300 VST.

In this scenario, she earns ETH on the collateral (Vesta charges a 20% performance fee) plus esGMX and multiplier points. Due to its locked nature, Vesta has yet to devise a way to share this revenue with the users.

She swaps 3300 VST for USDC or any other stablecoin, sends it to her Coinbase account (or any other exchange), and withdraws it to her bank account to provide for her business needs.

By doing this, Alice gets to keep her GLP in the long term while earning yields on it. She also manages to secure an interest-free loan, which provides for her short-term needs.

Customized Repayment Schedule

With vaults, users do not have any fixed repayment schedule. Instead, the terms are flexible, with no minimum payment or deadlines. As long as users maintain a healthy vault (collateralized as per requirement), they are free to repay at their convenience.

Earn Passive Income/ Additional Yield Opportunities on Vesta

Minted VST can be staked into the Vesta stability pools. It is used to buy under-collateralized debt, and the users earn the collateral from the liquidated vault. The stability depositors can thus expect to make gains from liquidations. The collateral and new debt are redistributed to all active vaults if a stability pool runs dry. Liquidators are also compensated for the gas cost. Depositors also earn rewards in the form of VSTA.

An example, Staking VST into the GLP stability pool lets users earn GMX at an APR of 4.41% plus the 10% liquidation bonus.

Conclusion

Vesta currently focuses on multi-collateral borrowing through the minting of VST, an over-collateralized and decentralized stablecoin. The protocol is designed to maximize liquidity for its users to be the most significant lending protocol on Arbitrum and eventually across all chains. It allows you to be your own bank at zero-interest borrowing. There is no credit check and a flexible repayment schedule. Additionally, users can leverage their position and earn yield through staking.

However, it is vital to consider the risks associated with opening vaults or using leverage.

An abridged version of this article is also published on Vesta Finance’s page
<https://medium.com/@VestaFinance/why-you-should-open-a-vault-on-vesta-2b1461487502>


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The information provided through this work is intended solely for educational purposes and must not be treated as investment advice. Any lapses in presenting any of the information correctly are ours alone. We disclaim any liability associated with the use of this content.

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