How Vault protects PWRD
PWRD is protected against stablecoin failures and certain smart contract risks
PWRD deposit protection comes from incentivising Vault users with higher yields. By rewarding Vault holders with a greater share of total protocol yields, Vault users agree to take on losses due to failure of any of Gro Protocol's component stablecoins or protocols.
This means if any of DAI, USDC, USDT, or the paired stablecoins fail or get off its peg, Vault holders absorb the loss and PWRD remains stable. The same is true if any of the underlying protocols fail and Gro Protocol loses money. Vault holders would absorb the loss and protect PWRD.
Credits to @ericbaleine from @CRE8RDAO for this video
As Vault holders absorb the loss for PWRD when any yield strategy fails, it is important to understand how to calculate Vault exposure levels.
Vault exposure to individual strategies is driven by (a) system level exposure to individual strategies and (b) Utilisation Ratio. The effective exposure of Vault to individual strategies is system level exposure * (1+ utilisation ratio).
For example, the system level exposure to a particular strategy is 25% and the utilisation ratio is 80%. This means Vault has an effective exposure of 25%*(1+80%) = 45% to this strategy. If the strategy completely fails, Vault users would lose 45% of their funds as it takes on losses for PWRD users as well.
When utilisation ratio is high, Vault holders are effectively taking a higher leverage – there is more PWRD funds sharing yields with Vault users in good times, but Vault also has more PWRD funds to protect in case any yield strategy fails.
To ensure this protection stands, there are two system limits to ensure PWRD TVL is always less than Vault TVL, so that PWRD stays fully protected.
This limit controls deposits into PWRD. When the threshold is passed, users are no longer able to deposit into PWRD as this would increase system leverage.
Current threshold: 80%
Above that point, economic incentives will help bring users back to the inflection point. There is therefore no reason to allow PWRD users to deposit beyond this point, and move further away from our target. If the inflection point of the P&L curve were to change, then this threshold should likely match the change for the same reasons.
How do I see this limit?
This limit is parameterised at the Controller contract's utilisationRatioLimitPwrd that you can see here. It can only be updated by the owner, which is now set as the Gro DAO Treasury multi-sig which you can see under Owner in the Controller contract.
This limit controls withdrawals from Vault. When the threshold is passed, users are no longer able to withdraw from Vault as this would increase the system leverage.
Current threshold: 100%
100% is used as on principal, the system should enable maximum withdrawal flexibility. Above that point, the system breaks and PWRD may not be fully protected. If the PWRD value proposition of being fully protected were to change, then this threshold could be reconsidered.
How do I see this limit?
This limit is parameterised at the Controller contract's utilisationRatioLimitGvt that you can see here. It can only be updated by the owner, which is now set as the Gro DAO Treasury multi-sig which you can see under Owner in the Controller contract.
Scenario: There are $2m of PWRD and $8m of Vault and one of the protocols generating yield which has a system exposure of 50% completely fails (e.g., smart contracts got drained).
- Combined TVL is $10m; 50% loss translates into a $5m loss which is less than Vault TVL. Vault completely absorbs the loss while PWRD suffers no loss at all.
- Utilisation Ratio is $2m / $8m = 25%.
- Vault's effective exposure is system exposure of 50% multiplied by (1+utilisation ratio) which is equal to 50%*(1+25%) = 62.5%. This is because Vault completely absorbs the $5m loss with its $8m TVL resulting in a loss of $5m/$8m = 62.5%.
- Once the losses incurred is written down, there is now $2m of PWRD and $3m of Vault. The new utilisation ratio is $2m / $3m = 66.7%.
- As the new utilisation ratio is below Util ratio limit Vault (100%), Vault users can withdraw funds up until utilisation ratio increases to 100%; as the ratio is also below Util ratio limit Pwrd (80%), PWRD users can deposit funds up until it hits 80%.
- Vault users would see the loss materialised in the form of decreased Vault token price. Note that the Vault token price in Coingecko or CoinMarketCap is not necessarily the same as what you could get by withdrawing from the smart contract. See Vault to learn more.
While Gro Risk Balancer systematically manages stablecoin and protocol risk, users should note that it cannot protect PWRD from acts of God or failure of Gro Protocol itself.
If you are willing to put in more effort to manage your PWRD stablecoins, you could also choose to stake PWRD tokens in our Pools for additional Gro DAO token (GRO) rewards. PWRD provided to PWRD/3CRV pool is not protected by Vault as you'll be holding LP tokens instead of PWRD directly.
DeFi is still a very new space, and while that's exciting, it comes with risk. Gro Protocol's software helps you access this world, but make sure you do your own research and only supply assets you can afford to lose.