secure value storage that permits liquidity generation
Vaults are a key concept within the Arkadiko protocol.
A Stacks wallet user is able to interact with the Arkadiko protocol to open a Vault. He can then add collateral to his Vault, resulting in an amount of borrowing power based on the value of his collateral in the Vault. When depositing STX tokens to a Vault, the user has the option to include them in the native Stacks Proof Of Transfer Cycle, earning yield.
Based on this borrowing power and collateral value, the user can create a debt in USDA. As compensation for this debt, he receives a token called USDA, soft-pegged to 1 USD.
We define the collateralisation ratio of a vault as <Vault Value> / <Debt Value> .
When the collateralisation ratio of a Vault dips below a certain treshold, the Vault's collateral is available for auction.
A Vault is also defined by the asset it can contain. Currently, only STX is used as collateral. We will add other assets in the future, the most obvious one being a wrapped or tokenized Bitcoin. Native Stacks tokens representing key protocols within the ecosystem can also be considered.
Next to the asset accepted by the Vault, there are other parameters to consider.
The Stability Fee is expressed in a percentage and is the total cost of borrowing for a Vault. A Stability Fee of 1% means that any debt you create will increase by 1% over the period of one year. This percentage is added continuously over time to your debt. Think of the Stability Fee as yearly interest on your USDA loan.
Arkadiko Vaults work by over-collateralizing your STX tokens. This means there will always be more value locked within Vaults than there exists USDA debt. If your collateral decreases in price, the ratio between the value of your collateral and your debt decreases. It is key for the protocol to manage this ratio to ensure that Vaults remain over-collateralized at all times.
Each Vault has set a liquidation ratio parameter. When <Vault Value> / <Debt Value> dips below the set liquidation ratio, the Vault becomes eligible for Auction. In short, this means that external Liquidators can come in and buy the collateral in your Vault at a discount, removing both your debt and the collateral from your possession. You will keep the minted USDA but your Vault and its debt are gone.
It is an absolute necessity for everyone interacting with Arkadiko and creating Vaults that they closely monitor the Collateralization Ratio of their Vaults. We advise a 200%+ ratio at all times, to be safe during periods of high market volatility. Improving the health of your Vault can be done by 1) depositing additional collateral into the Vault, increasing <Vault Value> or 2) repaying some of your USDA debt, decreasing <Debt Value>.
This parameter comes into play when a Vault has been tagged for Auction and is liquidated by an external Liquidator. The Liquidation Penalty, currently set at 10% for STX vaults, is the loss of value you experience when a Liquidator needs to step in to clear your debt. This is also the discount at which the Liquidator is able to buy the collateral in the unhealthy Vault.
The Liquidation Price listed on a collateralized Vault signals the price at which the Vault gets tagged for Auction.
This is the total amount of USDA that can be minted for a certain Vault type.
The total amount of USDA that has been minted for a certain Vault type.
Suppose we open a Vault and add 1000 STX to the Vault as collateral, with STX being priced at 2 USD. This gives us a <Vault Value> of 2000 USD. The Liquidation Ratio for this Vault stands at 150%, which technically means we can mint up to 1333 USDA. A slight decrease in STX price will already flag our Vault for Auction, resulting in a 10% penalty when it gets Liquidated. To avoid this, we only mint 1000 USDA at a Collateralization Ratio of 200%. This means that STX can drop as low as 1.5 USD (a 25% price drop) until the Vault gets tagged for Auction. Note that this is still quite risky as daily 25% drops are known to happen. We advise caution and prudence, especially if you are new to these type of constructions.
STX price increases to 3 USD / STX. Your Collateralization Ratio is now 300%. You mint an additional 500 USDA, bringing your Collateralization Ratio back to 200%. You now have 1500 USDA to work with.
STX price decreases to 1.6 USD / STX. Your Collateralization Ratio is now 160%, dangerously close to the liquidation threshold of 150%. You decide to fix your Ratio by repaying some of your USDA debt. You pay back 200 USDA. Your total debt now stands at 800 USDA. Your Collateralization Ratio is now healthy again at 200%. Alternatively, you could have deposited extra STX collateral to fix the Ratio.
STX price decreases to 1.6 USD / STX. Your Collateralization Ratio is now 160%, dangerously close to the liquidation treshold of 150%. You are sleeping or have lost interest in being a devoted Vault manager and do nothing. STX price further decreases to 1.49 USD/STX, meaning that your Collateralization Ratio is now 149% and your Vault is tagged for Auction. An external Liquidator notices the tagged Vault and repays the outstanding debt of 1000 USDA.
The value of the collateral in the Vault is 1490 USD. Given a Liquidation Penalty of 10%, you will only retain 90% of this value, equal to 1341 USD. Now as a Vault owner, you also retain the minted 1000 USDA. From the 490 USD value in STX, the Vault owner will keep 341 USD in STX while the Liquidator receives 1149 USD worth of STX.