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Venus Protocol Has A New Plan To Ensure VAI Remains A USD pegged Stablecoin
The world of decentralized finance (DeFi) is constantly evolving, with new protocols and strategies emerging to keep assets secure, offer new yield opportunities and empower investors. At the vanguard of this innovation is Venus Protocol, the first lending and borrowing platform on the BNB Chain. Nonetheless, even with an initial mover advantage, Venus Protocol persistently innovates, and it is now rolling out Venus V4, a comprehensive upgrade that includes a new plan to improve the reliability and steadiness of its native stablecoin VAI.
The following article will deep dive into Venus Protocol’s plan to strengthen its native stablecoin VAI, the potential use cases for its users and the impact on the broader DeFi ecosystem.
Introducing VAI: Venus Protocol’s USD Pegged Stablecoin
Before delving into the mechanics of VAI, it is important to understand the basics of stablecoins. Put simply, stablecoins refer to digital currencies whose value is tied to that of another asset, frequently the U.S. dollar, with the aim of mitigating the volatility inherent in cryptocurrencies. There are different ways in which issuers back stablecoins. In the case of Venus, the protocol allows liquidity suppliers to use their crypto assets as collateral to mint VAI in a decentralized way by interacting with the smart contract.
That means that VAI is a decentralized stablecoin overcollateralized by crypto assets and specifically anchored to the U.S. dollar. It is designed as a safe haven asset within the volatile crypto markets and primed to play a crucial role on the BNB Chain DeFi ecosystem and beyond. Let’s explore some of the potential use cases for VAI:
- Over-collateralization minting: Venus users can mint VAI by utilizing vTokens from their underlying collateral that they had earlier deposited into the protocol thus maximizing capital efficiency of the supplied collateral.
- Earn Interest: by depositing VAI into the Venus Vault and engaging in the Venus liquidity mining program, users can earn interest.
- DeFi and beyond: since VAI is anchored to USD by design, it can be used as an alternative to the volatility of crypto markets, and also for yield farming strategies, trading and many more use cases that will emerge from upcoming integrations.
What Is The VAI Plan?
The VAI remediation plan is a proposed strategy by Venus Protocol to attain and maintain the peg of VAI to $1. At a high level, this strategy is quite complex, so it’s important to break it down into segments to ease comprehension. The first step to understanding the VAI remediation plan is the Peg Stability Module (PSM).
The Peg Stability Module (PSM)
The PSM is simply a tool used by Venus Protocol to help maintain the stability of the VAI stablecoin. You can think of PSM as a safety net that helps ensure that VAI remains anchored to the U.S. dollar, reducing the impact of volatility and market and liquidity fluctuations.
With this general idea in mind, let’s explore an overview of the multiple parts that work in unison under the PSM framework:
- Stablecoin Association and Dual PSM Contracts: The PSM is associated with VAI and supports stablecoins contracts such as USDT and USDC creating flexibility for maintaining VAI’s peg.
- Fixed Conversion Rate for Swap operations: The PSM ensures that 1 VAI is always worth $1 by allowing users to swap VAI and USDC/USDT at a 1:1 conversion rate. Users can send VAI to the PSM and receive USDT (or USDC) if there’s sufficient balance in the PSM, and vice versa, as long as the configurable limit of VAI minted by the PSM isn’t surpassed..
- Configurable fees collected for Venus Treasury: The PSM has three configurable variables via VIP, which are the fees charged when USDT/USDC or VAI are sent to the PSM, and the maximum amount of VAI to be distributed. These fees are collected and sent to the Venus Treasury contract in VAI.
In summary, the PSM plays a crucial role in maintaining the peg of VAI to $1 by offering users the ability to swap VAI and USDT (or USDC) at a fixed conversion rate with no stability fee or interest implied. The configurable fees and limits provide additional control over the swapping process, while the collected fees contribute to the Venus Treasury, benefiting the entire ecosystem.
VAI Stability Fee
The second part of Venus Plan to strengthen VAI is the Stability Fee that was introduced through the VIP-81. A small stability fee for minting and burning VAI discourages users from buying and selling below or above the price of $1.00, reducing price volatility while creating value for Venus Protocol. Stability fee income will be used for handling extreme conditions such as bad debt, risk funds, and outlier events.
The stability fee will be adjusted based on a base rate, the price of VAI, and a floating rate. The interest rate for minting VAI will be set by governance going forward and it will encourage more minting when demand is high and VAI’s price is over $1.00 while discouraging minting when demand is low and VAI’s price is below $1.00.
Liquidity infusion and other stability measures
In addition to the introduction of the VAI Stability Fee and the upcoming release of the PSM module, Venus is taking additional measures such as providing liquidity for the VAI/USDT pair on PancakeSwap. This will ultimately increase the liquidity of VAI, facilitating smoother transactions for users and mitigating the impact of market volatility.
Providing liquidity to the VAI/USDT pair on PancakeSwap is key to support the PSM by providing a better trading experience with reduced slippage and tighter spreads. This will also facilitate greater accessibility for VAI to attract more users and use cases within the Venus ecosystem.
Other improvements to be released are implementation of VAI Savings Rate (VSR) to provide additional utility for VAI and the upgrade of the liquidation sequence to prioritize VAI
A Step Towards a More Reliable and Predictable DeFi Future
Overall, Venus Protocol’s VAI Remediation Plan is a significant move towards a more predictable and secure future for the Venus Protocol DeFi ecosystem. By implementing measures such as PSM, VAI Stability Fee and liquidity infusion, Venus Protocol is addressing key concerns around stability and security. This commitment will ensure that Venus Protocol continues to thrive in the DeFi world, and is a positive step forward for the crypto community.
To stay up to date with the latest developments and progress regarding VAI updates, can visit the Venus Protocol website and Dapp. For the latest news and events, you can visit Venus Community. For the latest updates, you can visit our Twitter and our Telegram Announcement Group. We also have a global community on Telegram. For users who prefer to communicate in their native language, Venus has Telegram groups in Arabic, Chinese, Czech, German, Filipino, French, Hindi, Indonesian, Italian, Japanese, Korean, Polish, Portuguese, Russian, Slovenian, Spanish, Thai, Turkish, Ukrainian, and Vietnamese.