Vaults: An Introduction

May 18 ,2023

Since the launch of Inter Protocol in late 2022, the usage and utility of the Inter Stable Token (IST) across Cosmos has been steadily expanding. This trend reflects a pattern of increasing demand for a native, decentralized, and liquid stable token for the interchain.

A native stable token that enables people to feel safe deploying large sums of capital into the ecosystem has been the missing piece for driving the next stage of DeFi growth across the interchain. A native stable token can facilitate alternatives that mitigate bridge risk, and lower barriers to entry for new players and new apps.

Today we’re excited to announce the next stage in the development of Inter Protocol and the introduction of the next IST minting mechanism: Vaults. 

Inter Protocol Vaults help unlock the value of ATOM and other interchain assets by enabling them to be used as collateral for minting IST. Vaults not only create a safer and less bridge-risked environment, they also provide additional value for holders of these interchain assets, in the form of a reliable stable token that can be used across multiple Cosmos zones. With Vaults in play, you can achieve all these goals without having to swap your crypto assets to mint IST.

Vaults Minting Mechanism

The first minting mechanism, the Parity Stability Module (PSM), enables users to mint IST using other stablecoins in the ecosystem (like USDC, USDT or DAI). These assets have been bridged across to Cosmos through either Axelar or Gravity. The PSM  ensures that IST remained fully-collateralized and risk-managed. This was particularly important at the early growth stage of the protocol, and set the stage for leveraging the extensible core of Inter Protocol.

Following the upcoming Agoric Mainnet-1B platform upgrade in May 2023, enabling the Inter Protocol Vaults contracts will enable acceptance of native Cosmos tokens as a collateral type for minting IST. The initial collateral type will be ATOM, but a mechanism will exist for the community to propose, and the Economic Committee to assess, new Cosmos collateral types. 

The ability for users to lock up their more volatile assets and mint a native stable one makes it easy to use the assets without having to sell them outright. It also gives DeFi users a more appealing, stable asset to deploy across the interchain should they desire. This, in turn, increases the proliferation of IST across the ecosystem and brings with it further liquidity and robustness. The flywheel of a highly liquid, composable, and fully decentralized stable token that enables growth across the ecosystem is what makes this an exciting moment for the interchain community.

The Importance of Stability in DeFi

One of the keys to stable tokens becoming the largest asset class in crypto and a catalyst for DeFi is their ability to serve as a  bridge between traditional and crypto economies.

Stable tokens are used as a way to hedge against crypto-asset volatility without having to convert crypto-assets back into fiat currency. USD-denominated stable tokens also enable traders to hold USD on-chain and better estimate the value of the capital they deploy. The additional benefit IST can now offer through Vaults, on top of being this reliable and resolute asset for traders, is the ability for users to grow their overall asset value by minting it, without having to give up any existing crypto assets.

How IST Remains Stable

Stability is the cornerstone of a stable token. The more that token trades consistently against its pegged value, the more trust and reliability users will feel, and the more its usage and liquidity will grow. Today, $IST is fully-collateralized. The introduction of Vaults evolves IST into an over-collateralized stable token, which means users will have to put down more collateral than the IST they can mint. Over-collateralization provides a safety margin for the protocol during times of extreme volatility, providing an extra measure of confidence that the peg will remain predictable and stable regardless of market impacts on the underlying crypto assets. The over-collateralization mechanism is further backstopped by a reserve, which will automatically deploy assets to help maintain the peg in hyper volatile conditions or when over-collatralization fails to provide sufficient surety. 

The final piece in the puzzle is the Liquidation Auctions mechanism which employs a uniquely built decentralized oracle network that will provide reliable, real time insights into market movement and trigger liquidations only when, and to the limited extent, necessary to protect the peg.

In our next article of the Vaults series, we will dive into these product features further, to better understand how they, and the community, help IST remain reliable, robust, and stable.

What’s Next?

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