Profit-Sharing Mechanism
In exchange for absorbing market failures, Vault holders get a share of PWRD's profits
Risk Balancer shares yield between PWRD and Vault through its risk- and yield-tranching mechanism. Vault holders take on the risk of market failures, so they belong to the high-risk and high-yield tranche. In a practical sense, one can think of PWRD holders as purchasing deposit protection from Vault holders. They get a superpowered stablecoin, while Vault holders get superior yields while only exposing themselves to time-tested, battle-hardened stablecoins and protocols.
Vault yields depend on the utilisation ratio, which is defined as
$ in PWRD / $ in Vault. Higher utilisation generates higher Vault yields but also increases the potential loss in case an underlying protocol or stablecoin fails (see example here). When utilisation goes higher than 80%, Vault holders are compensated more generously and could generate almost twice the yield they would if they had their assets in the same strategies, exposed to the same risk, but outside of the Gro protocol. See the following for more details.
Utilisation <= 80%
Utilisation > 80%
On top of yields generated by Vault deposits, Vault holders earn a portion of PWRD yields with a base rate of 30% plus 3/8 of the utilisation ratio. Vault holders' total yields thus increase with higher utilisation.
Vault total yields = Vault deposit yields + (30% + 3/8*Utilisation) * PWRD deposit yieldsFor example, at 50% utilisation, Vault holders would earn 30% + 3/8*50% = 48.75% PWRD deposit yields on top of what their Vault deposit generates before profit-sharing.
Imagine the protocol has $1M in Vault, $500k in PWRD, and a system yield of 10% variable APY (combining Vault and PWRD). Utilisation is at $500k/$1M = 50%. In one year's time Vault holders could earn 10% on the $1M Vault deposits i.e. $100k, assuming the realised yield stays at 10% APY; on top of that, the profit-sharing mechanism means Vault holders will also earn 48.75% of the $50k generated from the PWRD deposits to arrive at a total gain of $124,375.
On top of yields generated by Vault deposits, Vault holders earn a portion of PWRD yields with a base rate of 60% plus twice the utilisation in excess over 80%. Vault holders' total yields thus increase with higher utilisation at a faster rate than when utilisation was at or below 80%.
Vault total yields = Vault deposit yields + [60% + 2(Utilisation - 80%)] * PWRD deposit yieldsFor example, at 90% utilisation, Vault holders will earn 60% + 2(90% - 80%) = 80% PWRD deposit yields on top of what their Vault deposit generates before profit-sharing.
Imagine the protocol has $1M in Vault, $900k in PWRD, and a system yield of 10% variable APY (combining Vault and PWRD). Utilisation is at $900k/$1M = 90%. In one year's time Vault holders could earn 10% on the $1M Vault deposits i.e. $100k, assuming the realised yield stays at 10% APY; on top of that, the profit-sharing mechanism means Vault holders will also earn 80% of the $90k earned through the PWRD deposits to arrive at a total gain of $172,000.
It is precisely this profit-sharing mechanism that gives Vault holders high yields without requiring constant management. Your portfolio manages itself, keeping your exposure to any single stablecoin in a safe range, and rewards you just for being there.
Portion of PWRD yield claimed by Vault holders, depending on Utilisation
In contrast to PWRD, which keeps its price-stability by rebasing, Vault does not rebase and instead simply increases in exchange value over time. As yields come in from the investment portfolio, Vault holders can cash out through the Gro protocol for a higher and higher dollar value.
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.
Last modified 8mo ago