Vault Design

xUSD is designed to be minted from many different collateral types. This stops the protocol from placing all of its eggs in a single collateral basket. These differing collateral options present themselves to users as individual token vaults. Vaults can be backed by tokens that range from blue chip tokens like goBTC or goETH, to community tokens like COOP and AKTA. However all assets are not all identical and carry different risks. Vault design for each token takes these additional considerations in treated by the protocol accordingly. In order to protect users and the protocol, certain vault parameters reflect the conditions of the underlying collateral type.

One of the primary concerns with collateral tokens is overall liquidity. The lower the amount of available liquidity , the more rapidly prices will change when liquidation events occur, which could in turn affect other vaults of that collateral type. To protect against this several parameters are set differently for assets that have lower overall liquidity.

An example of collateral types of differing liquidity and corresponding vault parameters

The primary differences between smaller tokens and tokens with higher market caps are the liquidation threshold and the liquidator discounts that are associated that tokens vault. In order to accommodate small cap ASAs like PEPE, in this example, the protocol defines what a healthy vault means differently than tokens with higher market cap like ALGO. The liquidation threshold is much higher for lower cap tokens, meaning that the user has to maintain more collateral in the contract than higher liquidity assets like ALGO. This allows a larger price range for liquidations to be profitable, which protects the protocol against the creation of bad debt. This also limits users ability to loop/leverage back into the collateral asset, which can cause price instability with lower market cap tokens.

Another difference is the liquidator discount. This is increased for smaller cap coins, which further extends the ability to perform healthy liquidations and also incentivizes potential liquidators to watch for more profitable liquidation opportunities with more volatile small cap tokens.

A third safety measure built into the protocol is to limit the amount of debt that's available to borrow by any individual collateral type. Most of the xUSD in existence is saved in the reserve wallet. From the reserve wallet, the xUSD tokens are distributed to the individual collateral vaults, where they can be borrowed by users. Vaults cannot produce more xUSD than has been allotted by the protocol, this produces a hard limit for debt produced by each collateral type. This is important because it stops leveraging at a safe and sustainable level at a protocol level, limiting the risky behaviors individual users may prefer. This is both for protection of the protocol itself, and also the communities that over-leveraging could negatively affect in the case of liquidations.