Terminology
Vault:
A user may deposit an assets and open a Vault. It is used as backing to mint and withdraw USDVE.
Debt:
The amount of USDVE you have minted against the collateral in your vault.
Deposit Fee:
This is a one-time fee when collateral is deposited into Vaultedge. The fee amount varies depending on USDVE borrowed, collateral type and its backing percentage. As backing percentage increases and if the collateral is higher risk, the deposit fee is higher.
Redemption Fee:
There is a one-time 3% fee paid on redemptions.
Collateral Ratio:
The Collateral Ratio is the proportion of the total value of the Collateral to the total Value of the Borrowed amount. It is expressed as a percentage and indicates the degree to which the collateral backs the borrowed amount.
A higher Collateral Ratio means that the borrower has more collateral relative to the borrowed amount, which reduces the risk for the protocol.
Loan to Value (LTV) Ratio
The LTV ratio, on the other hand, is the proportion of the total value of the borrowed amount to the total value of the collateral. It is also expressed as a percentage and indicates the degree to which the borrowed amount is covered by the collateral.
A lower LTV ratio implies a safer position for the borrower, as it means that they have more collateral relative to the borrowed amount, reducing the risk of liquidation.
Individual Collateral Ratio (ICR):
The Individual Collateral Ratio refers to the specific ratio of a borrower’s collateral value to their debt. This determines how secure a single vault position is.
Example: If I deposit 1,000 AERO, priced at $2.75, the collateral value is $2,750. If I borrow 2,000 USDVE:
Minimum Collateral Ratio (MCR):
The Minimum Collateral Ratio is the lowest ratio at which debt can be issued in a vault. No Vault can be created below the MCR. If a Vault ICR falls below the MCR, it is now eligible for discounted redemption and potentially be liquidated.
Debt can't be issued when a vaults ICR is below the MCR
Critical Collateral Ratio (CCR):
The Critical Collateral Ratio (CCR) sets the ICR threshold at which a vault becomes eligible for Discounted redemption or liquidation by the Stability Pool. (Provided there is sufficient liquidity in the Stability Pool to cover the debt.)
The CCR represents the threshold below which a specific collateral type enters recovery mode.
When CR is below the CCR, the vault enters recovery mode.
Liquidation reserve:
When you open a Vault and draw a loan, 20 USDVE are set aside as a way to compensate gas costs for the transaction sender in the event your Vault being liquidated. The Liquidation Reserve is fully refundable if your Vault is not liquidated, and is given back to you when you close your vault by repaying your debt. The Liquidation Reserve counts as debt and is taken into account for the calculation of a vault collateral ratio, slightly increasing the actual collateral requirements.
Backing Percent:
How much of the protocol is backed by that particular asset. If the system has collateral valued of $1,000,000 and it has $200,000 of AERO, then it has 20% backing percent of AERO.
Recovery Mode:
Recovery Mode kicks in when the total CR of one specific collateral type goes below the CCR.
During Recovery Mode, vaults with an ICR below the CCR can be liquidated.
Other Useful Definitions
Stablecoin - Stablecoins are cryptocurrencies that are designed to be stable in price. Often times their market values will be pegged to some external reference such as the US dollar.
Peg - When something is pegged, it means that it is fixed to an amount at a particular level. For example, USDVE is pegged to 1 USD and should remain fixed to the price of 1 USD.
Annual percentage rate (APR) - APR is expressed as a percentage that represents the monetary value or reward that investors are expected to earn. This includes any fees or additional cots associated, but does not take compounding into account.
Staking - Staking is the process of locking up tokens in exchange for rewards for securing a protocol. By staking your assets, you support the blockchain network and help confirm transactions.
Arbitrage - Arbitrage is the process of purchasing and selling the same asset in different markets in order to profit from the difference in the listed prices. By profiting through exploiting market inefficiencies, it inadvertently resolves the price in different markets.
High-risk collateral - High-risk collateral refers to assets with high price volatility or low liquidity. These collateral types will have a higher MCR & CCR assigned to them because liquidation risk are higher due to fluctuations in price.
Last updated