⏬Lowering Vault Leverage Mechanics

Overview

In the past, we saw some turbulent operating conditions for many DeFi products, including our Automated Vaults. We watched the drama unfold with stablecoins due to the SVB collapse, then high USDT utilization, followed by significant volatility in asset prices where BNB moved -20% and +25% in the span of one week. There was also a Binance launchpad which caused a significant amount of BNB liquidity to be withdrawn from our lending pool, leading to yet another week of high utilization.

Despite all the challenges, our products proved resilient, and the Automated Vaults fully recovered from the temporary drawdown. Most of our vaults even showed a positive 1-month return during this chaotic time.

These past events successfully stress-tested our operations, and even inspired us to make some advancements to improve our Automated Vaults’ profitability and consistency. Namely, we devised a way to prevent AVs from suffering negative APR% as a result of high borrowing interest during a utilization spike period (such as a Binance Launchpad event).

How does lowering vault leverage work?

During a period of high borrowing utilization, the 8x Automated Vaults will temporarily reduce their leverage until utilization drops, in order to prevent negative APR from high borrowing interest.

The leverage will gradually be lowered (e.g., 8x-> 6x -> 4x), and then further reduced if the utilization doesn’t sufficiently drop as a result of lowering leverage. The AV will then return to its normal leverage level once the high utilization period ends.

In the first phase of this feature’s rollout, the decision to lower leverage will be made by the AV operating team, as we believe it is a safer approach to start with. After we’ve gathered more data, we will evaluate automating this leverage adjustment process.

As investors in the AVs, you do not have to do anything now to be able to take advantage of this feature in the future, and you will not have to do anything at times when leverage is lowered. Your investments will continue to safely earn yields even while temporarily at lower leverage. The Invest and Withdraw functions will also work as usual when AVs operate on reduced leverage.