Decoding the recent hot DeFi protocol Vaultka Could it become the next generation of high-yield, low-risk products

Unpacking Vaultka Could the Latest DeFi Protocol Be the Future of High-Yield, Low-Risk Investments?

Author: Meta Era, Crypto Big Brother

1. The Game Rules of the DeFi World

Although DeFi is the cornerstone of the crypto world, it also faces a lack of innovation. Perhaps paradigm innovation may not be seen in the short term. Currently, only a few projects have optimized in terms of details, such as introducing a lower wear and tear AMM mechanism, but this kind of innovation is no longer able to compete with platforms like Uniswap. On the contrary, platforms like Uniswap have also launched their 2.0 version (UniswapX) to make up for their own shortcomings. The core standard for measuring DeFi projects should be their yield, followed by innovation in patterns. If a project has a high yield, users will support it, and with a user base and total locked value (TVL), investors will also be interested, forming a virtuous cycle.

2. The Mechanism of Vaultka Protocol

Vaultka provides different revenue strategies based on LP tokens, achieving higher yields by leveraged long positions on LP tokens. For lenders (users who provide stablecoins), they can not only get the basic annual percentage yield (APY), but also share part of the revenue based on the leverage selected by the strategy user. (The maximum leverage can reach 5x, the higher the leverage, the more profit to share)

2.1 GLP/GM Strategy Treasury

GLP and GM represent the LP tokens of the GMX perpetual platform, whose value is equal to the package of assets (including BTC, ETH, etc.) divided by the number of GLP/GM tokens minted. On the Vaultka platform, users first deposit USDC into the platform, select the desired leverage multiple, and then the platform will borrow a portion of the USDC from the lending pool to purchase GLP/GM tokens on the GMX platform at the corresponding leverage multiple.

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Figure 1 GM Treasury Strategy

So why leverage long on GLP/GM tokens? This is because on the perpetual contract platform, as long as users continue to engage in contract trading, theoretically, they may always be in a loss state. The platform will continuously accumulate more package of assets, which will lead to a continuous rise in the price of LP tokens. However, there is a misconception here. Many people mistakenly believe that the platform will definitely make a profit as long as users incur losses. In fact, this is not accurate because the price of the package of assets is also affected by market price fluctuations. To illustrate this point, let’s take the historical price of GLP tokens as an example.

Figure 2 GLP Historical Prices

As you can see, the cryptocurrency market experienced a significant correction between January 2021 and June 2022, with a massive liquidation event in the futures market. This resulted in GMX acquiring more BTC and other assets, but due to the high volatility of these assets, it eventually led to a decrease in the price of the GLP token. Therefore, the price of the GLP/GM token depends more on the price of the underlying assets rather than just the quantity of assets.

Figure 3 Other Vault Strategies' Profits Compared to GM

Despite being in a bear market (the worst phase, according to the author, seems to be over, and the market currently resembles a sideways market), the GLP/GM token still manages to provide an annual yield of around 40%. However, when the bull market arrives and the cryptocurrency market enters a prosperous phase, the price of the GLP/GM token will far exceed $1. Based on project mechanisms and assuming users utilize the product with 5x leverage, their annual yield will far exceed 100%!

Now, let’s briefly introduce the HMX project. The HLP token is the platform’s vault, and LP token holders can deposit assets into the GMX to earn platform fee revenue. These token holders can then stake the GLP token’s voucher in HMX as liquidity providers and enjoy a share of the platform fees (65%). It’s like killing two birds with one stone as the dividends generated by the GLP token (usually in ETH) are automatically converted to GLP tokens and deposited into the HLP vault. This project can be seen as an added level of leverage on top of the GMX protocol and already has a certain market share and trading volume.

Figure 4 HMX Trading Volume Data

The third major feature of Vaultka is gDAI leverage, and Gains Network is also a perpetual contract platform. To trade on Gains Network, you first need to collateralize DAI and then generate gDAI to open long or short positions. One of the notable features is the price formula for gDAI: gDAI = 1 + accRewardsPerToken — Math.max(0, accPnlPerTokenUsed). In this formula, accRewardsPerToken represents the accumulated platform fee revenue share (always increasing), while the second half of the formula encompasses the value of user contract profits and losses. Similar to GMX, retail investors tend to be in a loss-making state as long as enough time passes, but unlike GLP/GM, the price of gDAI will continue to rise.

Figure 5 gDAI historical price chart

3. How does the protocol continue to operate?

The core goal of the Vault is to ensure sufficient borrowing funds to support leveraged long strategies. In order to attract more deposits, the protocol offers two APR modes, namely APR = Base APR + Bonus APR. The main determinant of Base APR is the total contract profit from the previous quarter, while the Bonus APR equals the total contract profit from the previous week minus Base APR. If the Bonus APR is negative, only the Base APR will be rewarded. Users also need to pay a certain high fee when using the Vault. As shown in the figure below, when users choose higher leverage, the income distribution will also be higher.Tips: The APR of the Vault is excluding revenue sharing! Assuming that the funds in the Lending Pool are not sufficient to cover the funds required by the Vault, additional investors’ use of the Vault product will be suspended, and the protocol will also coordinate the proportion of funds used by the current Vault users. Only when the funds in the Lending Pool are sufficient, the platform can continue to operate.

Figure 6 User income distribution

The protocol rewards are paid in USDC, which is a relatively prominent feature among many protocols. Because other protocols usually reward with their platform tokens and require a certain lock-up period (such as veToken or esToken) to be exchanged for other assets. This means that users cannot cash out immediately.The figure below shows the lending rewards in a bear market, with stablecoin borrowing rates at around 9%, which is quite attractive. If in a bull market, the Vault’s yield exceeds 100%, then the yield of the Lending Pool is likely to reach a level of over ten percent or even higher.

Figure 7 Deposit interest

4. Token economic model

The platform token is $VKA, and using the Vault of this protocol can earn rewards in esVKA. Each Vault has different esVKA rewards (adjusted based on deposit and other data), the benefits of holding VKA:

1. Up to 2.5 times the emission incentive for esVKA after pledging

2. Pledge together with esVKA to receive up to 60% platform fee sharing

3. Have voting rights, the more votes obtained by the treasury, the more esVKA emissions

4. Enjoy bribery income, other participants can bribe VKA holders to vote for specific treasuries

40% of the platform’s fees will be used for secondary buyback and burning. There are two modes of swapping esVKA for VKA: the first one is a 1:1 linear swapping (365 days), and the second one is a 90-day linear release, where only 50% of VKA can be exchanged.

The seed round was led by Rexian Capital and Meerkat Venture LianGuaiterner, with a total investment of $400,000 and a valuation of $8 million. The team and seed round investors will start linear unlocking after 6 months, and complete unlocking will take 18 months.

Figure 8 Token Allocation

5. Participation Methods

5.1 Airdrop Expectations (9.16–10.31.2023)

Using the protocol’s treasury and lending pool can earn point rewards. After October 31, the protocol will airdrop esVKA based on user points. The longer the time of using the treasury and deposits, the higher the score. Highest point rewards can be obtained through the following methods:

• The most cost-effective method is to deposit>$10 in each treasury product
• Then, deposit>$10 in each lending pool, but need to deposit>$2000 in one lending pool
• Refer three friends to use the platform (>$10 transaction volume), and enjoy an additional 10% point reward.

Figure 9 Airdrop Point Algorithm

5.2 Token Public Sale (DO time: 10.17.2023, 8AM UTC+8 — 10.20.2023, 8AMUTC+8)

The protocol aims to raise 500 ETH, and any excess ETH will be refunded proportionally to ensure everyone has a chance to participate and not be grabbed by bots. The total token supply for this sale is 8M, corresponding to a VKA price of $0.2 per VKA. The initial circulating market cap is only $800,000, which objectively speaking, is relatively low compared to other MEME or dog-related projects with several million dollars market cap. Considering the high return rate this product can provide to users, it may be undervalued.

Tips: The protocol will use 20% of the funds raised, which is 100 ETH and equivalent VKA, to build a liquidity pool for trading.

5.3 Increasing Liquidity in the Lending Pool (10.20–10.24.2023)

During this event, all LPs (Liquidity Providers) who deposit USDC have the chance to receive an 8% total bonus in esVKA. This esVKA bonus will be divided into four different tiers based on the number of participants, with early participants receiving higher staking rewards. Tips: During the event, LPs that were previously deposited need to withdraw funds and then deposit them again in order to be considered participants in this event.

In addition, the project plans to open a 10x leverage option for the vault on October 25th. Users will be able to stake VKA and esVKA and use the bribery feature, providing them with more strategic choices and investment opportunities.

Figure 10 esVKA Bonus Distribution Chart

6. Conclusion

In the fourth quarter of this year, the protocol plans to launch LP Index trading products. This product will provide users with a convenient way to invest in LP tokens from perpetual contract platforms without needing to understand each LP token in depth. The LP Index product will include all LP tokens in a certain proportion, providing users with diversified investment choices. In 2024, it will also generate corresponding products with Pendle. Afterwards, it will issue a stablecoin composed of Perp LP, which is worth keeping an eye on as the stablecoin market is still in a nascent stage with high market demand. However, most protocols do not have a high moat, so it is still uncertain who will be the leader in the market. According to the whitepaper, the advantage of using Perp LP Token is that it allows users to utilize idle LP Tokens, indirectly adding a layer of leverage to users, and the cost of this layer of leverage is almost zero; users do not need to buy other tokens or assets to generate stablecoins (excluding the cost of liquidation risk). Tips: This is the most idealized model, and more information should be obtained from official sources.

In summary, Vaultka provides users with a high-yield and low-risk strategy. This strategy theoretically generates ongoing profits, which is extremely user-friendly. High-risk individuals can enjoy high returns, while low-risk (lending) individuals can enjoy profit sharing. Additionally, in terms of project token distribution, users can receive token subsidies simply by using the platform (accounting for 42% of the total token supply). By utilizing the mechanism of esTokens, the selling pressure is locked, and theoretically, due to the project’s fundamentals and buyback mechanism, the buying volume will exceed the selling volume, providing true benefits to users and investors.

However, it should be noted that such platforms do not have strong moats in the competitive cryptocurrency market. Other projects can also launch similar products; it depends on which platform goes online with its mainnet first, thus accumulating a batch of early users and early market exposure. Additionally, this “always profit” mechanism is also built on the premise of no black swan events or major market corrections, so there is still a risk of liquidation. However, compared to the risks of contract trading, it is relatively smaller, while generating certain profits.

Note: This article only analyzes the project mechanism and fundamentals, and does not provide any investment or usage recommendations for the platform.

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