Vaults and Loans

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Vaults and Loans

German version of this article: Vaults and Loans (DE)

With the feature of a vault, it gets possible to take loans in a decentral manner. It enables users to create new tokens (“minting”) on the blockchain. The process is comparable to taking a loan from a bank, but without the whole bureaucracy and background checks around that. For calculating the height of loans, you can take, the only thing that matters is the value of the collateral that you have deposited in the vault.

Rules for the Collateral

Users are allowed to use the tokens DFI, dBTC, dETH, DUSD, dUSDT, dUSDC, and dEUROC as a security deposited in vaults, the so called collateral.

There are following rules to be considered:

  • In case you want to mint DUSD at least 50% of the collateral value must be provided in DFI. This rule stops the possibility of creating “looped DUSD vaults”.
  • For minting dToken other than DUSD at least 50% of the collateral value must be provided in DFI or DUSD – so the sum of the DFI and DUSD part mast be at least half of the collateral
  • Each DUSD in the vault counts as $1 in collateral.

You can select a loan scheme that define the minimum Collateral ratio between 150% and 1000%.

The higher this ratio is, the more collateral you will need for the same loan value, but also the interest rates that you will have to pay for the loans will be lower. As the rewards that you can earn with minted tokens (when you add them to liquidity mining pools) are much higher than the interest rates lower ratios are more efficient and don’t bind so much capital in the collateral.

When using a vault to take loans you always have to consider that crypto markets are very volatile and therefore the value of the collateral may vary a lot over time. Therefore, you always need to over collateralize to avoid liquidation. How much safety you need depends on your personal risk appetite and the volatility of the assets used in the vault. You have to decide with which collateralization ratio lets you sleep at night.

Should the collateralization ratio of the vault drop below the liquidation threshold of the chosen loan schema (e.g 150%) the vault will go into liquidation state. Please keep in mind that not only the value of the collateral influences the ratio, but also the assets you took as loans. For example, if you minted dTesla and the Tesla stock pumps, the collateralization ratio of your vault will drop (assuming that the collateral value stays the same). When a vault is in liquidation other users can bid on them via the auction feature. Basically, they have to pay back the loan and additional amount to win the auction to get the collateral of the liquidated vault. Auctions are further described later in this article.

The loans can be taken in DUSD or stock token. You can find a list of all tradeable tokens in the article Tradable dAssets on DeFiChain. Using vaults and loans you can run multiple strategies in the markets (long/short/neural) or create positions that provide cashflow. Going short on a token can be done by minting this token and selling it on the DEX, hoping that later you can buy it back cheaper later on to pay back the loan. You can even sell the token that you want to short for assets that you put in your collateral and repeat the process to further leverage your position if you are fine with the additional risk if markets don’t develop as expected. There is an extensive list of trading strategies in the article Investing & Trading with Decentralized Loans and Assets on DeFiChain.

Specialty for DUSD-Loans

There are so called unbacked DUSD in the system. Previously it was possible to pay back a DUSD loan with DFI. This option is now not available any more. On the other hand, backed DUSD are the ones that were created with vaults – they are backed by the collateral. To decrease the amount of unbacked DUSD a DFIP introduced negative interest rates for DUSD loans. This means that you actually get paid when minting DUSD as the loan value (debit) decreases over time because of the negative interest rate. This should create an incentive for users to create more DUSD loans and therefore increase the amount of backed DUSD in the system. The payment for such loans is taken from the DEX fee. Half of the DEX fee gets burned (meaning that the token get removed from the system) and the other half gets distributed over all DUSD loans. The negative interest rate changes every day, depending on how much DEX fee was paid in the previous days. A calculation of the current rates can be found here

Bidding on liquidated vaults

Because fluctuation of prices it my happen that a vault run into liquidation when the collateralization is not high enough anymore. In case of extreme volatility and changes of more than 30% in an hour, liquidation processes are interrupted to avoid mass liquidations. Users than have enough time to top up the collateral or pay back loans to avoid liquidation. Each auction runs for six hours and there is an individual minimum bid for each vault. The highest bidder pays the token in auction and get the collateral of the liquidated vault. The owner of the loan will receive the bidding deducted by a 5% fee that gets burned.

Summary for using a vault

Advantages/ possibilities

  • Hedges for stocks
  • Leverage of crypto positions
  • Increase of floating dToken in the ecosystem

Disadvantages/ risks

  • Risk of liquidation, can get reduced drastically by using tools like the bot from Kügi (VaultMaxi) or dobby
  • Interest rates on loans

Common misunderstandings

Even experienced users my come into a situation of confusion. We try to explain some of those points in question here

Oracles and DEX prices

Tokenized Assets on the DeFiChain are always called d[Asset], having [Asset] to be an official stock market ticker (symbol). When swapping such token on the DEX you will see that the price differs from the ‘real’ stock price. So, there are two different prices.

One price in the traditional markets on a Stock Exchange (e.g. Alphabet stock traded on the NASDAQ) or on a centralized crypto exchange (like Bitcoin on Coinbase). These prices are the Oracle prices, that are also the base for taking a loan (“minting”).

On the other side there is the DEX price, that depends on the supply and demand inside the DeFiChain ecosystem. The ratio of token in its trading pool steers the price, that an asset is traded for on the DEX. This price can vary from the oracle price to be higher (premium) or lower (discount).

To have these two prices do not vary too much, there is a possible arbitrage trade to keep the prices in close range. For crypto assets these can be done via cake and external central exchanges that list the asset in question. Cake is currently the only gateway to swap from a dToken crypo position on the DeFiChain to the real Token (BTC, ETH, …) that can get withdrawn over the corresponding blockchain.

For the stock token the prices are kept in range vie the Future Swap happening once a week. There is one block where previously locked future swaps are executed where you can buy a dToken with max +5% premium of the oracle price or sell with max -5% discount to the oracle price.

No Bids on auctions

There may occur market situations where it is not cost efficient to bid on liquidated vaults because the token would be cheaper on the DEX. In this case the vaults will stay in auction and the owner of the vault can hope that the collateralization ratio goes back up to have this vault taken out of the liquidation process in the next round.

Will I be liquidated if the mentioned rules above are not met anymore

As mentioned in the chapter 2 Vaults and Loans#Rules for the Collateral above there are certain points to consider in the collateral. If there are 50% DFI required, but the DFI Oracle price drops so that this minimum ratio is not met anymore you will NOT be liquidated because of this fact. The only thing is, that you will not be able to take additional loans as long as the requirement is not met again.