[IDEA] VAI Minting Mechanism Improvements


We are a group of DeFi quant professionals who have extensive experience in trading, banking and risk management. Some of us are pioneers in the crypto industry. We started our DeFi journey two years ago, and have been supporting Venus Protocol behind the scenes for more than a year. Recently, stable coins have been making headlines, so we did a deep dive into VAI and DAI minting mechanisms and discovered some improvements which can make VAI more solid as a stable coin.

Our Findings:

  1. Some desirable characteristics of stable coins are not fulfilled by VAI. Some are results of the weaknesses in VAI minting mechanism:

    1.1 Collaterals used for VAI minting: there is no restriction on which types of collateral can be used to mint VAI. Collateral Factor helps to mitigate the market risk but cannot control the risk in a black swan event.

    1.2 VAI position is considered together with other borrow position: Compared to MakerDAO which allows users to only mint/borrow DAI, the minting of VAI in Venus behaves the same as a normal borrowing. When a user’s position is underwater (i.e. eligible for liquidation), the liquidators actually can choose to return another token in the debt and seize a portion of the collateral. When liquidation fails to restore account health and the liquidator chooses to return other assets instead of VAI, VAI becomes under-collateralized. [It is great that Venus plans to “Upgrade the liquidation sequence to prioritize VAI debt reduction” in their recent proposal PROPOSAL: Deploy the VAI PEG Stability module and Supply Liquidity to PancakeSwap for the VAI/USDT Pair]

    1.3 Some holders cannot redeem VAI for 1 USD as they wish. There are only two cases in which people return/burn VAI: a) the minters can burn/redeem VAI they minted at any time b) People who bought VAI in the secondary market only can redeem VAI and seize other collateral in a liquidation event. The recent proposed VAI PEG Stability module helps to address this point to a certain extent.

  2. We also found that there is Lack of VAI use cases. This is also, in part, a function of the previous point.

    Currently the only use case of VAI is to stake in Vault and earn reward. People cannot redeem VAI to get equal value of assets. (This is a result from the VAI mechanism) If there is a way for people to redeem VAI for $1 assets, there will be arbitrage opportunities and trading activities will increase.

    In addition, we found staking VAI is not a very good use case, as it does not release liquidity to the market. Thus the market depth is not there and it is vulnerable to market manipulation.

Having said that, we still think VAI can be promising. Venus is one of the largest DeFi protocols on the BNB Chain and it has been actively managing and improving the protocol. For VAI to become solid and increase adoption, we have the following suggestions.

Our Suggestions:

  1. Restrict collateral types allowed for minting VAI OR we can set more conservative CF for minting VAI (i.e. the collateral factor used in minting VAI can be set differently from the ones used in borrowing other assets)

  2. For each collateral type allowed, set a ceiling of collateral quantity. It ensures diversification in the collateral types. And the ceilings can be set up and continuously adjusted so that a healthy mix of collaterals is backing up VAI.

  3. Isolate the collateral used for minting VAI. The collateral put to mint VAI should be separated from the rest and only used for backing up VAI. The collateral cannot be lent out like the other regular collateral.

  4. We need to replace vault-staking VAI with a new use case. An easy start can be to add a VAI market with its collateral factor set to 0. Instead of staking VAI in the vault, people can get reward by supplying their VAI and the reward will depend on the demand (borrowing). Slowly, the VAI vault can phase out.

We welcome feedbacks and new ideas so that we can refine and come up an actionable detailed proposal from these ideas.


I like this proposal. I am not quite sure, that the proposed use case “implementing a money market” (as I understood) is a showrunner, but the Vault drains liquidity, this is for sure.

I like the idea of diversification very much and am a fan of more conservative CFs for VAI.

Could be implement a solution where VAI minting is isolated from the rest and only used for backing up VAI as suggested, BUT also have the possibility, to break up this isolation as a kind of one way road if VAI becomes undercollaterized and have some kind of “claw” into the “nonVAI collateral” but not the other way around?

(Sorry no native speaker, hope I explained the idea well enough)

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Hi @Hiromatsu thank you for your feedbacks. I totally get your idea, your expression is very vivid!

I think it is a bit difficult to enable VAI to have access to collaterals used to borrow other debt. Also if we design it in such a way, the user will probably start using separate addresses to mint VAI and borrow other debt to bypass this design.

In addition, it does not seem fair. The best we can do is to make sure the risk parameters are set up properly and be selective in collateral allowed to mint VAI. By doing so, it will be very unlikely for the minted VAI to become under-collateralised.

This would be a great add indeed to avoid risk of one collateral to blow up VAI completely.

This is a general trend in lending protocols which makes sense. That would be a complete rewrite of the protocol so maybe not a good use of thin resources.

We see adding a VAI market as possibly a better solution than having VAI hardcoded as different. The protocol could mint VAI to be put on this market to get a somewhat similar result to what we have but with an interest rate curve. It’s not clear is adding one now will make much of a difference and if a protocol manager savingVAI is not better. Adding that savingVAI would be ERC20, with a price starting at $1 and always increasing so getting some utility in DeFi.