0VIX Research — How safe can lending in DeFi be?
Decentralized Finance has seen explosive growth in the past few years as more and more people prefer it over the traditional banking system. Despite the huge spike in popularity, DeFi still has one major flaw — volatility. This unpredictability isn’t directly tied to DeFi, it is simply the nature of the crypto markets. In order to make up for these price fluctuations, market participants have to provide high collateral. On top of that, crypto assets are often affected by each other — if the price of a single asset suddenly drops, others might follow it down or spike up. On top of the high collateral, users will often lend or borrow more than a single asset. In fact, users can borrow and collateralize the same asset. All of this makes DeFi a complicated system to get to grips with. That’s exactly what the 0VIX protocol was built for.
0VIX aims to be the native money-lending protocol on Polygon. Why Polygon? Over 50% of all assets locked in DeFi are based on Ethereum. Let’s face it, ETH is here to stay and it’ll only get better after the upcoming Merge and Sharding upgrades. In addition, layer-2 solutions are already doing some serious work and there’s no better example out there than Polygon. It’s the leading platform for Ethereum scaling and infrastructure development. Polygon’s scaling solutions have already seen widespread adoption with over 3000+ applications, more than $1 billion transactions processed, 100M+ unique user addresses and $5 billion+ in assets secured. By building on Polygon, 0VIX benefits from all that liquidity, as well as low transaction fees and fast confirmation times on a decentralized, safe and secure network. Polygon’s Ethereum Virtual Machine (EVM) also allows 0VIX users to benefit from well-known and user-friendly on-ramps, wallet technology and interfaces.
Naturally, our close association with Polygon Network means that 0VIX must maintain a solid level of excellence when it comes to reliability and performance. That’s why the 0VIX protocol is being continuously stress-tested across multiple scenarios to demonstrate its resilience. Our agent-based, market risk assessment model simulated the lending protocol with highly volatile price trajectories using multi-asset data from the past 3 years, including the COVID-19 crash in March 2020. Indeed, the widespread economic damage caused by the pandemic has provided us with a true Black Swan trial of the crypto markets. Similar techniques, are widely used in traditional finance by institutions ranging from retail to central banks, in order to ascertain the financial stability of our economies.
But we didn’t stop there. To collect statistically significant data, 1000 simulation runs were performed for each set of desired protocol parameters. Each simulation run tracked the evolution of 1000 user portfolios across Bitcoin, Ethereum, Matic, and USDC, regenerating their individual allocation at each run such that results aren’t biased by specific portfolio configurations. We simulated the protocol’s behavior to stress-test the leverage that users usually deploy. This was done by subjecting user portfolios to randomly generated price trajectories across all assets. In the near term, this allows us to offer user-facing products such as a dashboard to more easily manage 0VIX portfolio risk. In the long term, we’ll be able to optimize protocol parameters and help guide governance proposals with data-driven intuition. If you want to take a deeper dive, take a look at our research paper: https://0vix.com/market_research
Another point in our research was the topic of liquidation. The 0VIX protocol stability is governed by the fact that all liabilities are redeemable. To maintain this, we modeled liquidation as an incentive mechanism where a liquidator is rewarded for performing the foreclosure event. Our results show that this liquidation mechanism works, and the system remains stable even in the worst price-action history of $MATIC when it dropped 14% in a single day.
Our research findings confirm our belief that the 0VIX protocol is ideally suited for decentralized lending markets. One great benefit of 0VIX is that it will also generate data-driven protocol upgrade proposals that can be voted on and evaluated by governance participants. This allows the protocol to be backed simultaneously by real-world data as well as its community’s voice. $VIX is the native token for the 0VIX protocol. It has a capped total supply of 200m $VIX and is paid out as a reward for interacting with the protocol. A legally registered DAO entity in Switzerland will hold 51% of the total supply, while the rest will be distributed between strategic partners, a public sale, the team and personal experts (legal, marketing, future hiring pool). The only way for users to participate in the governance of the protocol is by acquiring veVIX tokens. As locking the $VIX token is the only means to obtain veVIX, users get incentivized to play a long-term strategy and HODL their tokens.
Locking $VIX gives you a veVIX in proportion to the length of time a user chooses to lock their $VIX for. The maximum locking duration for 0VIX is 4 years, and if 1 VIX is locked for 4 years, the user will receive 1 veVIX in return. This scales linearly and if a user were to lock 1 VIX for 1 year, they would get 0.25 veVIX, for 2 years they would get 0.5 veVIX and so on. The veVIX token is non-transferable and has a built-in decay mechanism. The closer you get to the end of your $VIX lock-up period, the more your veVIX will decay. Ultimately, it’ll hit zero and you’ll be able to withdraw your locked $VIX.
Giving users the ability to lend and borrow from a core protocol such as 0VIX opens up many interesting opportunities. Lenders can supply static assets, transforming them into interest-bearing tokens in a permissionless fashion, while still having access to their underlying asset at any time. The ability to borrow assets gives users vastly increased options and exposure. By using assets they own as collateral, they can gain exposure to other capital without the need to sell their underlying asset.