[UPDATED 07/07/23]

Introduction

Vesta Finance is a stablecoin lending protocol best described as a fork of Liquity and the $LUSD token, but with more collateral types and built on Arbitrum. The $VST stablecoin offers minters other notable advantages like dynamic interest rates, juicy yield, and fully custom vault parameters by collateral type.

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

The Problem

Today the decentralized stablecoin landscape is relatively bare. With Terra $UST’s collapse, the once-flourishing narrative flipped on itself and new competitors had to work hard to approach their designs in more sustainable, yet still decentralized ways.

While many 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. It aims to be the go-to L2-native stablecoin powering the DeFi economies of rollups like Arbitrum, Optimism, zkSync, etc.

The $VST stablecoin will use dynamic interest rates known as the “reference rates” which fluctuate based on demand and underlying collateral risk. The protocol deploys deposited collateral to earn additional yield and offset interest rates.

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

How Does it Work?

To take out a loan on Vesta (mint $VST), users open a vault based on the type of collateral they’re depositing. Vaults currently accept $ETH, $renBTC, $gOHM, $ARB, $GMX, $GLP, and $DPX collateral with more types expected in the near future. Vesta has so far preferred to onboard censorship-resistant collateral.

Vaults are over-collateralized, so more collateral value must be put down than $VST minted. Each collateral type has custom parameters adjusted for its risk/volatility and overall demand:

• minimum collateral ratio (MCR)

• debt ceiling

• dynamic interest rate

The MCR dictates the lowest ratio in which the collateral value can be relative to the borrowed amount. If the borrower’s collateral value falls below a vault’s minimum collateral ratio, the collateral is liquidated. The debt ceiling is a mint cap which determines how much total $VST can be borrowed against that collateral type.

The dynamic interest rate paid by borrowers known as the “reference rate”. This replaces Vesta’s previous zero-interest model which relied on redemptions to maintain the peg. Reference rates change in response to $VST’s peg stability, rising when below peg to encourage repayments and falling when above peg to encourage supply expansion.

Borrowers may earn additional yield depending on the type of collateral they deposit. For example, $GMX deposits are immediately staked to earn $ETH yield. $GMX depositors get 80% of this $ETH yield just to borrow $VST (currently 3.02% APR)!

$VST offers holders some decent yield opportunities, most notably staking in Vesta Stability Pools. Staked $VST in a vault’s Stability Pool earns a bonus from vault liquidations, as liquidated collateral is purchased with staked $VST and distributed to the pool. Should a 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’s V2 ambitions aim to re-construct its protocol design and improve $VSTA’s token utility. Ultimately V2 should improve $VST liquidity, achieve the multi-chain vision, and foster a stream of sustainable cashflow for $VSTA stakers. Most importantly, V2 makes the move away from interest-free loans to improve peg stability and increase protocol revenue.

The recent Hearth Upgrade V2 proposal outlines these planned efforts. To deepen $VST liquidity on Curve, Vesta V2 would share collected interest with liquidity providers on Curve. LPs would need $VSTA to qualify for this extra yield, adding some more utility for the token. Users could also lock the 80-20 $VSTA-ETH LP token to earn bVSTA, which can be used to either boost $VST LP rewards or turned into vested $VSTA.

V2 may also explore a hybrid liquidation mechanism to reduce liquidation penalties. Stability Pools are complemented by collateral auctions as a new option for $VST liquidations. The V2 proposal mentions plans to merge Stability Pools and the Savings Module into a single “Main Stability Pool” for all $VST vaults.

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 anticipated feature, which would algorithmically arbitrage the $VST peg on behalf of the protocol.

With enough growth after V2’s full release, Vesta plans to accept any type of collateral like NFTs and tokenized fixed-income positions.

Partnerships

Vesta is partnered with Frax Finance, an Ethereum-native stablecoin protocol that offers the decentralized $FRAX stablecoin. Together, Vesta and Frax and mutually benefit from deeper liquidity through jointly-incentivized VST-FRAX pools.

Vesta is also formally partnered with Olympus DAO, and $gOHM remains the largest proportional backing by far for the $VST stablecoin at a whopping 52.92%. $VST is becoming more popular in Arbitrum’s DeFi ecosystem, recently onboarded as collateral for the Sperax $USDs stablecoin for example.

Vesta is also advised by a lurking, shadowy orca figure with bunny ears who deepens $VST liquidity and increases LP incentives.

Tokenomics

$VSTA Price: $0.17

Market Capitalization: $2,508,304

Circulating Supply: 14,188,750

Total Supply: 100,000,000

$VST Price: $1.00

Market Capitalization: $7,107,433

Circulating Supply: 7,107,433

Learn more about the token distribution here and emissions here.

$VSTA is the protocol’s governance token. Vesta is said to be in the works of releasing a vote-escrowed version of $VSTA (veVSTA) that models the veCRV token. Lockers would get more veVSTA the longer they lock, and earn a share of yield and fees collected by the protocol.

As mentioned before, Vesta intends to expand to more L2s and even other layer 1s like Solana. As $VST grows, this generates more fees for the protocol and $VSTA lockers when veVSTA is released.

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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DISCLOSURE: I do not have any exposure to Vesta’s $VST or $VSTA, nor am I affiliated with Vesta. I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.