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(This article largely deals with permissionless public blockchains. Naturally, some things are simplified. Keep these in mind.)

Imagine yourself standing on a street’s sidewalk. Look around you, what do you see? To your left a woman is using her credit card to buy her morning coffee. One block away people are lining up to get their vaccination. Behind you a branch of a commercial bank just opened its doors to its customers. On your phone you get a news notification of your representative having voted against his campaign promises in Congress. What is common among all of these situations? That people are forced to trust others. The woman with her credit card? She is placing trust in the card issuer, she is placing trust in her bank, she is placing trust in the currency, and she is placing trust in the vendor. The store is doing the same: it trusts its suppliers, it trusts its payment processors and so on. After this thought exercise, it cannot be ignored that trust is everywhere and is a basic building block of our society. Sadly, the ones we have to place our trust in today have gotten increasingly centralized. Even your local mom & pop shops likely use infrastructure and service providers that are controlled by a major corporation, institution or some other central entity. On top of this, we are seeing more and more instances where these stakeholders misuse and abuse the powers and trust they have been granted by the people. Unsurprisingly then, there is a brewing trend to reject established institutions, systems, and figures. This effect permeates through politics, government, business, and media as highlighted by the 2020 Edelman Trust Index (0–100):

What if you did not need to rely on these parties when doing your daily activities? What if instead trust was guaranteed, and not dependent on anyone? Blockchain is this new structure of trust because in a blockchain system there is no single entity that controls things and the way information is stored and used leaves a permanent trail. Moreover, everyone can be a contributor to the system in a transparent and decentralized fashion. The question everyone rightfully asks themselves at this point is:

Okay, but how exactly does blockchain technology deliver on these promises?

To avoid this article becoming yet another technical mumbo-jumbo littered graveyard, let’s do another thought experiment to answer this question. Imagine you are doing puzzle with your friends where each of you is completing your own but same puzzle. You are doing this in a collaborative way where if one of you finds a piece and realizes where it fits, you as a group check the back of the box and say “yeah, that fits here”. And so you come to a consensus and each of you places new pieces in your own puzzle until you are finished. If someone is regularly calling out fitting pieces, that person gets rewarded for it, let’s say with candies. In a real blockchain setting, it is usually digital tokens bearing fiat currency value.

Blockchains run in a similar way operated by their participants where information is not stored in a central location, but is stored by network participants who share and validate this information collectively. Just like in the puzzle example, everyone has a copy. If others want to join in on the game, they just look at your puzzle and copy it piece by piece until they get the full picture. (If you are familiar with how torrents work, this is the same peer-to-peer principle.) But there is a catch: this blockchain puzzle is not an ordinary puzzle. It is a puzzle set that just keeps on growing with new pieces. The puzzle that previously depicted only a castle now has an entire forest around it with a lake on the horizon. In a blockchain solution this means new blocks with novel information that also have to be validated.

That’s cool but what if you tried to introduce a puzzle piece from another set? Then it would just get thrown out the window by the group because everyone realizes it just does not fit and you are trying to ruin their fun. Hence, there are also mechanisms to discourage bad actors. Just like in a puzzle, the way the pieces (blocks) fit together in a blockchain you cannot just take out one piece and replace it with another. Each piece depends on the others. Everything fits together perfectly.

I used this puzzle game example to get the basic concepts of blockchain across, but it is slightly twisted for simplicity’s sake compared to how a real blockchain looks like. As the name suggests, a blockchain is a single chain of blocks where the blocks follow each other one by one in a linear, chronological way. Each block contains unique information. If we stayed with the puzzle example, this would mean a quite strange puzzle set that only had one infinitely expanding row of puzzles where every new puzzle piece depended on the pieces that came before it — like in an iron chain.

From the technical side, this is done through cryptographic algorithms (hence the name cryptocurrencies). These algorithms ensure this unique construction of trust. One could even say that blockchain is just a shiny piece of code that was designed in a unique way. Yet, this design that guarantees a tamper-proof nature is what makes blockchain so trustworthy. It allows us to have ledgers that store records in an immutable and decentralized way. In other words, you cannot just go back and change something. This alone is a major value proposition that fuels use cases in finance, health care, supply chain management and more as it introduces immense trust and resilience into these fields. Not only that, but this capability can also translate to cost and time savings.

Let’s highlight another part of our puzzle example. Did you notice that there was no one playing boss or bullying others into doing what he/she wanted to do? This is because the group worked together based on distributed democratic consensus where everyone could have a say. Even if the bully wanted to ruin your puzzle, he/she would have had to successfully fight off the group first, which would have been highly unlikely and not a good time for the bully. This decentralization is the second value proposition of blockchain technology after ensured trust and immutability. In the puzzle example, everyone had personal freedom (and responsibility) to participate. More and more players who confirmed the legitimacy of new pieces emerged. These are “node operators” in a blockchain, and generally the more there are, the more decentralized and secure the network is.

If we take a real life example of sending money online to your friend, by the point your money arrives it travels through banks, clearing or payment systems, and others. Why can’t you just give the money directly to your friend without having to trust any one of these intermediaries? Blockchain technology eliminates the need for these intermediaries. You can directly send digital assets from your wallet to the other person’s wallet, just like with cash. The decentralized nature of the blockchain makes this intermediary-free way of transferring value possible as the validation and other processes are outsourced to the network. In this example, the confirmation of a transaction requires multiple participants’ agreement instead of relying on the mercy of financial and other institutions. Which brings us to our next pain points.

Another thing up blockchain’s sleeve is that it is permissionless. What this means is that you do not have to ask for someone’s approval before you can participate. In our puzzle example, you and your friends did not have to ask your parents if you could play. Likewise, they did not just interrupt you mid-game telling you to go do your homework either. Whereas in the money transfer example, the bank had to first check your personal details and other information when you first opened your account and continued to retain control over your ability to transact. This only scratches the surface, but the larger financial control grid is more pervasive than one might think. This 2017 speech by Andreas M. Antonopoulos explains how limiting the current financial system is with economic exclusion, financial censorship, surveillance, and more:

For instance, one rather overlooked angle when it comes to commercial banking is that you do not legally own the money in your bank account. You simple have a right to that money because you so generously loaned it to the bank. Which money is then used by the bank to finance credit to its customers. In other words, they own your money, not you. This becomes clear during bank runs when withdrawals are mercilessly limited and all of a sudden it dawns on you that your money in the bank is not actually your money. Whereas, blockchain makes self-custody possible where you really are the owner of your wealth and do not have to rely on anyone’s permission to do what you will with your money. If you think more about your daily activities, you begin to realize that we are excessively bound by organizations, conglomerates, governments and other gatekeepers. An advantage with blockchain is that it creates an open environment where everyone is allowed to participate without even the chance for the system to assert control over you.

Blockchain technology also advances democratization of access to financial markets as it diminishes significant barriers of entry. For example, if someone wants to trade stocks or derivatives, through projects like Injective Protocol and Mirror Protocol that person has complete freedom to do so without the tedious brokerage registration, the long and cumbersome clearing and settlement processes, and unnecessary intermediaries asserting control at every step. In simpler terms, it also allows anyone to send and receive money.

This unfettered openness does not stop at the enjoyment of what the network makes possible (like boundless money transfer), but it also means the concrete running of the network, creating a space that is decentralized and open, both in terms of operating the network and in terms of using it. Ultimately, it lets users be in control of the system they are using themselves. This also means that the network cannot just be turned off, as it lives on the back of the participants which makes it censorship resistant.

One could say, this is where it all the magic comes together and where blockchain technology really shows what it is capable of. Take the previously mentioned points of decentralization, openness, and immutability together, and add on top of them a programmable environment that can be designed to execute almost any action and you get what the techies refer to as smart contracts. These contracts are different than normal contracts in the sense that they execute automatically by themselves if the terms of the agreement are met. Simply, if one thing happens another thing will happen with certainty, without the need for interruption from anyone. These contracts can be anything where agreement and actions are involved between parties.

This programmability allows solutions to emerge such as lending protocols where you can loan or borrow digital assets (such as bitcoin or even fiat-pegged tokens such as USDC) without any central authority telling you what you can or cannot do, while interest payments are also automatically assured. Further examples are Decentralized Exchanges (DEXs) where the liquidity to facilitate trades is pooled together from the community (aka liquidity providers). These providers earn yield in return for providing their digital assets to be used as liquidity in exchanges between two digital tokens. Another use case can be found in governance where owners of a digital asset are granted voting rights in how a network or protocol should operate. This is how decentralized autonomous organizations (DAOs) work, a unique type of organization that is self-governed such as Cardano’s Project Catalyst or SingularityDAO. There could be so much more to explore here. The point is that programmability and smart contracts enable us to design immensely better systems in a vast array of industries that enhance individual sovereignty. They open the doors to customizable solutions where those solutions did not exist before and make things like programmable money possible. Scott Stornetta, who is considered by many to be the co-inventor of blockchain technology, worded it this way at the 2021 Inevitable World Summit:

“We have the chance to go back to our original ownership of our own unalienable rights and rebuild the structures that we want to execute on our behalf. […] We want to empower certain constructs to exercise our individual autonomy”

Of course to make all this possible, information has to be processed somewhere. Sticking to decentralization, this is not done by huge data centers that are controlled by companies but is done by the participants themselves in a distributed fashion as each participant can contribute with their own processing power and get rewarded for it proportionally. This way immense processing power becomes available for use cases in artificial intelligence (e.g. SingularityNET), cloud storage (Filecoin) and more including the fueling of major protocols like Ethereum.

Digitization (or tokenization) of real-world assets has been a prominent trend in the industry for years. What it entails is creating representations of these assets on the chain in the form of digital tokens. Why is this a big deal? Because with tokenized assets, previously illiquid assets can be exchanged in real time getting rid of processes that have traditionally been full of hassle. Examples include precious metals, real estate, and venture capital. For instance, in real estate an apartment complex can be divided into parts that are each represented by a token which tokens then can be put on the market. The value for the new landlord is access to a property that would have been inaccessible otherwise due to a too large upfront investment or regulatory/administrative limitations. Furthermore, as this can allow properties to be co-owned by multiple people, it also makes things like proportionate rental income possible. Therefore, a previously illiquid asset can be transformed into a liquid and accessible one with added value on top.

Although there are remarkable use cases with blockchain technology, most projects are struggling with what is referred to as the trilemma between decentralization, scalability, and security. For example, although some projects provide decentralization and security at a high level like Bitcoin, scalability remains an issue. This can show itself in elevated transaction times and transaction costs as the network gets congested. Ethereum, a champion of smart contracts and programmability, is also plagued with high transaction fees. Solving such scalability challenges often requires compromising on either decentralization or security. Despite this, there are potential solutions on the way.

Code remains code. Although there is no need to trust intermediaries, you still have to put some trust in the network that it will work the way you want it to. Although Bitcoin and Ethereum, two of the largest projects have a relatively solid track record, there is always a chance for exploits to surface in most protocols that might undermine the network’s security. Then again, a lot of things we use today are running on exactly the same thing: code. And in many cases, open-source blockchain projects are more rigorously tested than conventional ones we use today. Just think of the dinosaur-era systems most insurance providers still use in their operations, not to mention cybersecurity vulnerabilities and data breaches.

There is no hiding it. As it stands today, most blockchain applications have complicated and not so user-friendly customer journeys that cripple mass-adoption. If one looks farther than cryptocurrency exchanges, direct participation in blockchain protocols usually has high technical barriers of entry that the industry will have to solve over the years if it wants to attract average consumers.

Because there is no central authority, no asking for permission, no safety nets, an unusual amount of responsibility lies in the user when interacting with blockchain projects. An easy example is if you send money to the wrong recipient, there is no going back, no customer support to call. Poof, that money is gone. Yet, I personally believe that the advantages of decentralized and permissionless systems far outweigh these risks. Still, users must exercise ownership over their activities which comes with a good understanding of the given project.

Since the blockchain scene is relatively new, there is a lack of regulatory frameworks that address the unique services built with this technology. The eternal debate if cryptocurrencies are commodities or securities is still largely with us, tokenization is covered in a thick mist of regulatory questions, and there are further challenges around client protection, asset protection, general supervision of service providers, trading, AML & KYC processes, taxation, risk awareness and more. Yet, there is hope on the horizon with the likes of Liechtenstein recognizing blockchain projects with what they call “transaction systems based on trust technologies”. Switzerland has also been at the forefront of this regulatory innovation, most recently with what is referred to as the Blockchain Act and a vibrant blockchain ecosystem further supported by the Crypto Valley Association.

Nothing starts out perfect. Take Spotify, Netflix or any other service you enjoy. Chances are, they were nothing like what they are now. No, it took years and years of work and tinkering to get them to where they today. In another example, who could have predicted in the 1990s what the internet will bring in thirty years? In the same vein, with blockchain seeing what is possible is key. Already as we speak there are many legitimate projects putting concrete results down on the table which are getting us closer to seeing what lies beyond the horizon. Proposals to solve scalability issues are also in the pipeline such as Eth2 with Ethereum. A beneficial side-effect of the immaturity of the space is that current inefficiencies are captivating many startups to enter the scene and try their hands at solving these problems in their own way with unique selling propositions on the side that increase experimentation potential and innovation further. The point is, we can improve on today’s challenges. One day, whether in 2, 3, or 5 years we will get to a point where certain protocols are perfected and ready for mass-adoption and the incredible promises of blockchain technology will come to worldwide fruition. With this natural strive for innovation in the air and the rapid development of the ecosystem fueled even by institutional interest, I remain persistent that blockchain at its core is not just a silly buzzword thrown around without meaning.

Rather, it is an innovation that finally advances technology to our benefit with no veiled privacy violations, no corporate censorship, and no further centralization. It empowers us individually and as communities without the need for excessively large governments or power-hungry corporations that could overstep their authority.

Part of the problem of building in DeFi is a trilema of:

Coverage: having timely support for new projects as they come online so user positions are available in dashboard)

Features: useful features people need that may not be fee paying, often UI only)

Tokenomics: (features and systems which capture value for the token holders).

Assume you can only have 2 of them not all 3, what do you choose? Its a balancing act… Especially given one often impacts and can accelerate or decelerate the other

At the end of the day it comes back to the core metrics we measure success by:

Everything we do at Step must fit into these broad categories and a key focus this year is exposing more trackable data to Steppers on these categories. We previously shared some of the metrics on AMM growth last month https://twitter.com/StepFinance_/status/1473947884395667460 and will be providing more monthly metrics on xSTEP distributions like we do here.

These two are baseline requirements to ensuring Step remains the largest portfolio manager on Solana. We will be focusing on integrating major projects more thoroughly than before (transaction history support etc) and picking and choosing our integrations based on demand. Crucial to all of this is ensuring the app remains snappy and fast, right now with all the integrations its starting to slow down in some areas but we are working on speeding things up as evidenced by our deployment last week speeding up DEX order loading by 80%.

We have been pleased to see the release of Tribeca, we always intended on building this sort of setup but having an open platform that the rest of the ecosystem is partaking in is a much better situation to be in. There will be some customisation and likely additional contract(s) we will need to build for our situation however we think this will bring a few big benefits to Step.

Firstly locking for a rev share of protocol fees in addition to vote weight will remove more STEP from circ supply. Secondly you need an economic reason to lock and vote for gauges so we are considering a few models that may make it more enticing, boosting yields and AMM TVL while limiting incentives to < locked amount so all incentives are a NET reduction in circ supply. Thirdly we might look to tie this into our soon to be launched Reward Options in some way with lockers able to influence the number of reward options they can accrue.

We will have more info on this at a later date.

We hear your feedback! There are lots of things we want to implement as cool features to make life easier for everyone. A few more tools will be live soon in addition to NFT Gallery enhancements and other things we will keep quiet on for now. One big thing holding back more development here is getting some of our performance redesign done first which will speed up subsequent developments.

xSTEP will be the core asset used for locking/staking and borrowing against. There are some easy wins to be done like lending protocol listings, automated leveraged xSTEP farming via borrowing STEP and depositing xSTEP and also some more involved large scale contracts which we will talk about later.

The idea we are pursuing here is any future value accrual must have more than 1 purpose and must impact more than 1 area of the Step platform. For example with more people locking via Tribeca that reduces circ supply which given same demand increases price which increases TVL as half of Step TVL is STEP denominated which reduces swap price impact which incentivises more swaps from abitragers from Jupiter which increases APYs for LPs which incentivises more LP deposits etc…

Youll already see Step appearing on some of your favourite crypto websites and podcasts today. We are excited to be sponsoring the Layah Heilpern show, Banners/Logos on DefiPulse, The Defiant and mentions in Altcoin Daily and other popular platforms. We are eager to partner with more influencers in the space where we can to get the Step message out there to a wider audience and also are improving our online reach by having more brand ambassadors and community advocates as part of the team.

A key part of this is referrals. Doing referrals in the old world for CEXs is easy however when applying it to DeFi its much more difficult ensuring the system cannot be gamed/exploited. Referrals are on our roadmap and we want to get them implemented soon as we have time and priorities allow.

This is a generalised list of our goals for Q1, there will no doubt be some surprises good and bad along the way but looking forward to the journey and onwards and upwards!

Step Team

As the layer two revolution grows exponentially there is a need for a decentralized stablecoin and lending protocol that can power the system. This is where Vesta Finance comes in with a decentralized overcollateralized stablecoin. It is the first Arbitrum native decentralized lending protocol and is growing quickly. It is overcollateralized in comparison to many other stablecoin projects that are undercollatoralized instead (such as UST although they are moving to being backed by BTC). The concept of overcollateralization and undercollateralization might confuse some so the previous article got you covered. In essence, there are more than 1$ worth of assets for every stablecoin making it very strongly backed.

Why is this important? It makes the protocol robust enough to enable low minimum collateral requirements in order to lend the stablecoin. This allows for more capital efficiency and unlocks more value. With that said, let’s deep dive into the protocol.

Essentially, it is a lending protocol that enables you to lend up to 90,9% of the collateral due to the fact that the protocol has a 110% minimum collateralization ratio. This means that if the collateral amounts to $100 you can take a loan against it up to $90.9.

The advantage Vesta has over other competitors is its first mover advantage on Arbitrum in comparison to other decentralized stablecoins. Being able to capture value as the Arbitrum ecosystem is still in its infancy and grows puts the protocol in a pole position to capitalize. Not to add that less fees are incurred on the participants in comparison to the Ethereum mainnet as well. The protocol has so far acquired a TVL of $57.4M and a market cap of $5.6M. Basically, it has a market cap/TVL ratio of roughly 0.1.

However, it is not simply a lending protocol that enables you to use your assets as collateral. As a user you also have the possibility of getting paid by liquidating others. This is done by acquiring VST and staking it in a stability pool. How does these stability pools work?

Stability PoolsThe stability pools purpose is to guarantee the health of the protocol and absorb the debt of liquidated users. Considering the “risk” people take from depositing VST into the stability pools, they are rewarded with the liquidated collateral distributed to stakers. While you are staking VST in the stability pool you are earning an additional APR that differs depending on what asset you are staking. Ranging from 8.24% → 9.56% → 11.02% for ETH, BTC, and gOHM respectively at the time of writing. This APR is earned in VSTA tokens where the rewards come from the community treasury.

Moreover, the minimum collateralization ratio of the protocol stands at 110%. This means that if you commit to the stability pools and liquidate other users, you are bound to profit since they are liquidated at a value above the collateral. This is important to point out as every liquidation that occurs will empty a portion of the stability pool. The same portion will be emptied from your deposit.

Example: If you deposit $100 of VST and the protocol liquidates borrowers that will empty 10% of the stability pool. You will have $90 of the deposited VST left in the stability pool.

However, the liquidated collateral is distributed at the same rate to the participants in the stability pool. This means that they make a profit due to the collateralization ratio.

Incentivizing LiquidityBeing an early adopter of protocols has its perk. Vesta Finance’s liquidity mining is set up to incentivize liquidity protocol is a testament to this.

If there is something that is the be-all and end-all of stablecoins, it is liquidity. The more liquidity you have, the less price sensitive the coin is to large volume. This is why Vesta is incentivizing deep liquidity by entering a partnership with Frax to co-incentivize a liquidity pool at Curve (I will not go through Curve in this article, because even my wife’s boyfriend know about the Curve Wars at this stage). The FRAX-VST pool on curve is one of the deepest liquidity pools on Curve’s Arbitrum deployment. It gives you a base APR of 9% and max APR of 22% depending on how long you lock in your stake. Not a bad opportunity during these volatile times.

The idea behind this is to aim for consistent growth over time in VST supply and utility. I doubt it comes to any surprise that stablecoins are fundamental to balance AMM pools. When people want a safer asset to hold as they are in profit on other tokens, the stablecoin demand increases substantially. Considering Arbitrum is still at an early stage, this allows Vesta to capture a lot of value if they can incentivize liquidity successfully.

The other option would be to enter a liquidity pool consisting of the governance token VSTA and ETH and earn 37% APR in VSTA and 25% in Balancer. In order to do this you need to get the LP token on Balancer and then deposit it on Vesta. This comes with higher risk than the previous option considering there are two volatile assets in the liquidity pool, hence the risk of impermanent loss.

The Vesta Finance team is a pseudo-anonymous team that was put together by gigabrain 0xMaki. The co-founders are I.O.W Mikey and 0xAtum and they are being strategically advised by DCF God and Not3Lau Capital. However, they had a funding round that acquired additional support.

Angel round and supporters

The round’s participants include: Tetranode, DCFGod, Fiskantes, Not3Lau Capital, Sam Kazemian, 0xmons, Wangarian, OmniscientAsian, PopcornKirby, Nick Chong, Calvin Chu, Jae Chung, Anthony Sassano, Eric Conner, Mariano Conti, Shuyao Kong, Feir, and many more.

More about the vesting will be covered below.

TL;DR: the coins will be vested under the same terms as the contributors for strategical alignment.

VSTA

Vesta Finance is a two token protocol that consists of the governance token VSTA and the stablecoin VST. The total supply of the VSTA token will be 100 million. The following distribution of the supply is as follows:

Out of the current total supply, only 5 million of the VSTA tokens are in circulation. The reason behind this was recently clarified by the Vesta team in a recent Twitter post that outlines that they want to keep a large community treasury to build the protocol further. This would involve contributor programs, grants, and DAO alignments (one of these collaborations involves Redacted that will deposit their gOHM into Vesta).

In regards to the people that got early access to the token such core team, contributors, and advisors along with strategic partners, the tokens are vested linearly over two years with a six month cliff (cliff means that you get fully vested after a specific time/date).

Considering Vesta is a similar protocol to LQTY (Liquity which is an interest rate free lending protocol on the Ethereum mainnet) 2% of the supply will be available to the LQTY stakers. However, more information regarding this will be provided. The idea behind is because the LQTY team have been co-operating with the Vesta team along with advisory. This airdrop will be vested over the long-term to align incentives between the two communities.

The VSTA token gives you governance rights over the protocol as well. These rights will let you vote on interest rates, minting fee rate, and new collateral types. This will take place on Snapshot which is the industry standard at this point. As the protocol plans to become more decentralized over time, the protocol have allocated more than 50% of the supply to the community treasury. This is a work in progress as the development team are trying to build solid foundation that the community can capitalize on in the long term.

VSTThe other token is VST which is the stablecoin. It is minted by either depositing collateral or acquiring it directly on decentralized protocols such as Balancer. The question that normally arises when projects issue stablecoins is how it will keep it peg.

These redemption fees makes sure the VST stablecoin gets intrinsically backed and maintains a price floor of $1. With these standard parameters taken into consideration, there are some scenarios where you are not able to redeem your VST. This brings us to recovery mode.

Recovery ModeRecovery is a state that kicks in when the total collateralization ratio falls below the critical collateralization ratio for the deposited asset. During this phase the protocol blocks borrower transactions that could lead to a further decrease in collateralization and amplify the critical state in recovery mode. It pushes the user to behave in a way guide the system away from recovery mode.

The protocol have not been in recovery mode yet since the possibility of it becomes a self-fulfilling prophecy that avoid it happening. However, it would be interesting to see how things would develop when it happens (I will follow it and update this post accordingly in that scenario).

How to acquire VSTA and VST

The classical approach would be following:

VSTA

2. Go to the official Arbitrum bridge or other bridges like Hop Protocol, Synapse etc. and bridge Ethereum to Layer 2.

3. Convert your Ethereum to $VSTA on Balancer but leave enough to pay gas fees.

4. VST

5. Remember, if you want to pay less gas fees there are no requirement to bridge assets from the Ethereum mainnet, which is why I mentioned other bridges. If you have assets on other blockchains that you want to move to Arbitrum, that works as well.

6. Main risk that I have identified are the unlocks worth paying attention to. Nobody likes getting dumped on even though it is a part of the game. If you want to minimize the risk, stay viligant when the unlocks are bound to take place. However, due to a vesting schedule the risk is not as high here compared to other protocols. This is why it is important to have an Angel round with people that have some skin in the game, which has been the case for Vesta. Doing it with web2 VC’s is just asking to be dumped on (just look at the coins in the Solana Ecosystem). Also, Vesta Finance is based on Liquity which is robust protocol and well-audited. However, they are not identical and changes have been made to the contract. One audit have taken place with 1 more planned for Q3 2022, 10 minor issues were found which have been highlighted by Crypto risk assessments. Supporting different collateral types naturally entails more smart contract risk. Although it is a risk worth taking.

7. Vesta is an interesting protocol that is betting on capturing value on Arbitrum through its first mover advantage. If Arbitrum keeps growing over time and other competitors does not dilute the market then it could turn out to be a successful strategy. The protocol have plans to expand to other L2’s and become cross-chain on L2’s such as Metis and zkSync. This would enable added value capture for Vesta. However, there are some concerns as well. After the initial hype when it was released, there have been a stark decline in user activity of the protocol. While this can be credited to Arbitrum not being mainstream yet, crypto is all about network effects and this is a current weakness that will play a big part in the long term prospects of the protocol.

8. Momentum have significantly slowed down and how the team deals with this will be seen with time. Also, it is a similar protocol to Liquity which is deemed an “underrated” protocol for the amount of users they have, despite a great product. Vesta is facing the challenge of not going down a similar fate. Nonetheless, being able to loan up to 90,9% of your collateral is a welcome change in the business of overcollateralized DeFi loans.

9. Lastly, there are tons of projects in the market that have stablecoins, diluting liquidity with one another. From a strategical standpoint it’s understandable since you are able to internalize fees. However, the market indicates that users want to hold trusted stablecoins. Although in this case it does makes sense for the protocol as people want a stable asset to receive when they take out a loan. Nevertheless, there is a chance that we reach a point where talented teams put their minds together and decide to merge instead.

10. I want to clarify that even though I am a finance professional, this is not financial advice, and this article is only meant to bring light to the current market situation. I advise everybody to do their own research, I only want to help you to find what you are looking for. If you enjoyed this piece, feel free to share it and subscribe.

11. richmorecapital.medium.com

12. richmorecapital.substack.com

13. 
    

So what exactly is Liquity and when would you need it? We’re talking about a lending-borrowing protocol, where you provide your ETH as collateral to receive Liquity’s own stablecoin which you can use across the ecosystem. What’s special about it is, you only need to collateralize >110% of the value, however, to avoid liquidation at least 150% is recommended. Assuming you’re borrowing more than 2000 LUSD.

Who maintains the stability of the ecosystem? The “common money” is provided from a stability pool contributed by stability providers and the borrowers themselves. Through complete decentralization, lack of governance, nearly complete transparency, and a unique Frontend Operator system (Frontend Operators provide a web interface to the end-user enabling them to interact with the Liquity protocol) the protocol is very censorship-resistant. Not a lot of protocols can tell it about themselves, that they don’t even have a website-based dApp.

What else makes it so unique? Liquidity charges no interest on their loans, nor is there a fee when you have to repay your loan as a borrowed. You heard it right, there are no additional costs to it. The only fees you have to pay are those when borrowing, or redeeming LUSD (in LUSD for the borrowers, in ETH for the redeemers). The fees can’t exceed 5% though, which, allow me to say it, is pretty damn amazing.

A Trove is where you take out and maintain your loan. When do I have to pay back my loan? The fun part is: whenever you want. As long as you keep at least 110% of the collateral value you can safely keep the borrowed assets. In case you fall below that 110% you get liquidated and have to pay a fee to ensure stability in the pool.

So how can you earn with Liquity? There are basically two ways to do this: either you provide LUSD to a stability pool and earn LQTY (Liquity’s own token) and ETH, or you stake the said LQTY earning LUSD and ETH. Those are obviously the simple methods “provided” by the protocol itself. But let’s not forget the possibilities a loan gives us: arbitrage on the ETH price.

While all of it is set for everyone to gain, there are events of possible unpredicted loss. Where there is gain, there is usually also risk. As a borrower, you are exposed to risk in case your collateral in ETH gets liquidated, thus you have to compensate Stability Pool depositors. As a Stability Pool depositor, however, once you get compensated in ETH, which decreases in value shortly after, you’ll be negatively affected. Another possibility of losing funds (in terms of losing some ETH exposure) is when your Trove is being redeemed funds against. Last but not least, a hack can occur. This is where Solace steps in to insure you from such unfortunate events.

Solace trusts Liquity, but why should you? First of all, tons of other big protocols demand LUSD as a treasury asset. Why specifically LUSD? Because of its complete decentralization and lack of governance, it’s a perfect candidate for other DAOs to allocate their treasury, since it cannot be altered or frozen by other, partially centralized stablecoin-issuers. Who trusted in LUSD? For example OlympusDAO. Or Fei Protocol. Or DXdao.

Another reason why Solace, a coverage protocol loves Liquity? Liquity is the 3rd highest rated protocol for security on DeFiSafety.com. Not impressed by the number?During a major ETH price crash on May 19, 2021 despite massive liquidations the protocol managed to maintain a healthy balance and rebound quickly into stability. More on this here:https://medium.com/liquity/how-liquity-handled-its-first-big-stress-test-160f20d5b18f

Liquity is here to stay in DeFi. So is Solace. A perfect match completing each other.