Introduction

Vesta Finance is a stablecoin lending protocol best known as a fork of Liquity and the $LUSD token, but with more collateral types. It is native to Arbitrum, and its main product is its $VST stablecoin. $VST offers minters unique advantages like interest-free loans, juicy yield opportunities, and fully customized vaults by collateral type.

Vesta has a vision of being a dominant layer 2 stablecoin protocol, and what it has in the pipeline definitely positions itself to achieve this vision.

The Problem

The decentralized stablecoin landscape is relatively bare. With Terra $UST’s collapse, the narrative did a backflip and new competitors worked hard to approach their designs in more sustainable, yet still decentralized ways.

While decentralized stablecoins already exist, there is always room for improvement and variety with these models. For example, Liquity’s $LUSD similarly offers zero-interest lending but only accepts $ETH collateral.

The Goal

Simply put, Vesta is building a CDP-powered lending platform with a wider range of collateral than its competitors, and borrowers pay no interest.

Vesta is also working on a UI for leveraging positions where users can automate a looping process (similar to abracadabra’s $MIM) of minting $VST, using the $VST to buy collateral, and depositing the collateral to mint more $VST until the desired leverage is reached.

This would make Vesta an all-in-one L2-native stablecoin lender powering the DeFi economies of rollups like Arbitrum, Optimism, and zkSync.

How Does it Work?

To take out a loan (mint $VST), users open a vault on Vesta depending on their collateral type. Vaults currently accept $ETH, $renBTC, $gOHM, $GMX, and $DPX collateral with more types (like $GLP) expected in the near future. If you haven’t noticed, Vesta has so far preferred to accept strictly decentralized collateral.

$VST has a 0% interest rate, so borrowers only pay a one-time mint fee which varies to control supply. Vaults are also over-collateralized, so more collateral must be put down than $VST minted. If collateral value falls below a vault’s minimum collateral ratio, it is liquidated.

Depositors may earn additional yield depending on their collateral. For example, $GMX deposits are immediately staked and earn $ETH yield. $GMX depositors get 80% of this $ETH yield (currently paid 4.59% APR) just to borrow $VST! Vault parameters like mint caps and minimum CR are adjusted according to each collateral type’s inherent risk.

If $VST falls below $1, it is always redeemable for its underlying collateral. Users choose which collateral they want to redeem for (assuming there is any left of that type) and get $1 of collateral for every 1 $VST they redeem. Redeemers pay a 0.5% fee.

$VST also has some decent yield opportunities, most notably Vesta Stability Pools. Users can stake $VST into any vault’s Stability Pool and earn from vault liquidations. Liquidated collateral is purchased with staked $VST and then distributed to the pool. Should a Stability Pool run dry, both the collateral and new debt is “redistributed” to active vaults. Liquidators are also compensated for gas cost.

How Does it Work? Vesta V2

Vesta has V2 ambitions to re-construct its protocol design and improve token utility for $VSTA. Ultimately, Vesta V2 aims to achieve the multi-chain vision and foster a stream of cashflow for $VSTA stakers. Most importantly, it plans to move away from interest-free loans to increase revenue.

On top of this, V2 brings a hybrid liquidation mechanism to reduce liquidation penalties. In this, the Stability Pool would be complimented by collateral auctions as a new avenue for $VST liquidations. V2 should also establish a “collateral locking” mechanism.

Cross-chain minting would be another fantastic feature of V2, allowing users with collateral deposited on one chain to mint $VST on any other supported chain. The release of a $VST AMO for peg stability is yet another feature, which would algorithmically arbitrage the $VST peg on behalf of the protocol.

With sufficient growth, Vesta plans to accept any type of collateral after V2 like NFTs and fixed-income positions.

Partnerships

Vesta is partnered with Frax Finance, an Ethereum-native stablecoin protocol that offers a partially-collateralized and partially-algorithmic stablecoin design with $FRAX. Together, Vesta and Frax and mutually benefit from deeper liquidity through incentivized VST-FRAX pools.

Vesta is also formally partnered with Olympus DAO, and $gOHM remains the largest backing by far for the $VST stablecoin. $VST is becoming more popular natively, accepted as collateral for the Sperax $USDs stablecoin for example.

Vesta is also looking to cooperate with a lurking, shadowy figure with bunny ears in order to deepen $VST liquidity and increase LP incentives.

Tokenomics

$VSTA Price: $0.65

Market Capitalization: $4,936,785

Circulating Supply: 7,557,166

Total Supply: 100,000,000

$VST Price: $1.00

Market Capitalization: $7,678,138

Circulating Supply: 7,722,869

SOURCE: Coingecko

Learn more about the token distribution here and emissions here.

$VSTA is the Vesta governance token. Vesta is in the works of releasing a vote-escrowed version of $VSTA (veVSTA) that models veCRV. Lockers get more veVSTA the longer they lock, and in return receive yield and fees collected by the protocol.

As mentioned before, Vesta intends to expand to more L2s and even other scalable layer 1s like Solana. As $VST grows, this generates more fees for the protocol and $VSTA lockers when veVSTA is released. This release is set for Q3 2022, which ends in one month.

Conclusion

Vesta is quietly building an advanced protocol design that maximizes liquidity for its users and brings more variety to the market. It is taking a well-thought approach to $VST and V2, and Vesta’s growth will surge in cashflow for veVSTA holders.

Vesta is ready to ride the Arbitrum wave. A new dawn of stablecoin protocols are on the come up, and while many shrug off Vesta as “just a Liquity fork”, they may soon come to find out that Vesta is rising to be so much more than that.

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