Unmasking Vaults: Everything You Need To Know
How’s it going #CrystalCrew 👋? We hope you’re excited about the upcoming release of our very own Vaults on PolyCrystal.Finance 🤩! If you have no idea what a Vault is or how it works, this article is for you! Together we’ll go over everything you need to know about Vaults, how they work, and how PolyCrystal takes its own spin on Vaults as a service 🧐.
What Are Vaults?
Vaults are a general term in DeFi (decentralized finance) normally used to describe a type of protocol that is designed to grow assets by means of compounding interest. In other words, a vault is a protocol designed to exponentially grow your balance of cryptocurrency tokens through yield aggregation. The key word here is exponentially 🤑!
Normally, we are used to receiving rewards in a linear fashion. Such as through a yield farming protocol like PolyCrystal. On PolyCrystal we can deposit some $CRYSTL💎 tokens or LP tokens, and in return we earn rewards by a linear metric such as APR (annual percentage rate).
The PolyCrystal Mines are an excellent example of a linear rewarding system. In return for providing CRYSTL-MATIC LP, we can continuously earn $CRYSTL💎 by claiming it to our wallet whenever the rewards accumulate to our satisfaction 😀. The rewards are linear because the rate at which you earn tokens stays the same (assuming other parameters such as price, and liquidity provided by users other than you remains unchanged).
In this example the APR is 384.61% which means on $1000 worth of CRYSTL-MATIC you would receive $1000 x 384.61% = $3846.1 worth of $CRYSTL💎 tokens after a one year period (assuming all parameters remained the same).
However, consider this: What if every single day you were to take those $CRYSTL💎 rewards and sold half of them for $MATIC, then used the remaining tokens to create even more CRYSTL-MATIC LP which you then once again deposited into the Mines? That means on the next day, your rewards would be even bigger than the last (assuming all other conditions were the same)! If you were to keep doing this, you would constantly be able to earn more daily $CRYSTL💎 rewards while also growing your initial deposit! This kind of growth would be exponential, because the very rate at which you earned tokens would increase 😮!
If you refer to the APY (Annual Percentage Yield) metric, compounding your $CRYSTL💎 rewards daily like this would turn that $384.61% APR into an astounding figure of 4490.65% ROI (return on investment). That means your initial $1000 deposit would yield an astounding return of $1000 x 4490.65% = $44,906.5 😲! Obviously, this is a significant difference.
Now, rather than daily, imagine if you were able to perform this kind of compounding much more frequently, on the order of hundreds of times per day. The results would be even more astonishing 🤑! And this is exactly where Vaults come in! Vaults are a powerful DeFi service capable of auto-compounding generated yield tokens for more LP and doing these sort of actions on your behalf, many many times a day 🧐. Every time you gain even a little bit of $CRYSTL💎, a Vault protocol would automatically use that $CRYSTL💎 to create more LPs and re-stake them. With frequent compounding, it’s easy to see what makes Vaults such a powerful and popular DeFi service 👍.
How Do Vaults Work?
Hopefully the previous section has shed some light on the idea behind Vault services. To make it even easier to understand, check out the diagram above which outlines the general idea of how Vault contracts automate the compounding process for any arbitrary token LP pair made of token A, and token B.
How Do PolyCrystal Vaults Work?
Now that you have a good understanding of what Vaults are, let’s build upon this concept! The above diagram represents the process implemented by PolyCrystal’s very own upcoming auto-compounding Vault services!
Note the key difference from the previous diagram. Instead of using a split of 50%/50% for LP, PolyCrystal Vaults use a split of 47.5%/47.5% to grow your LP and use the remaining 5% rewards to buy $CRYSTL💎 from the market and then burn it out of existence 🔥!
How Do Vaults Benefit PolyCrystal?
As explained above, PolyCrystal Vaults are implemented with a 5% buyback used to burn $CRYSTL💎 tokens. This opens up a brand new avenue for PolyCrystal to support and grow the price of $CRYSTL💎. What’s important to keep in mind is that PolyCrystal is not limited to only creating Vaults based on native farms 😉! In other words, PolyCrystal can create Vaults for tokens from external platforms but still have a beneficial impact for $CRYSTL💎 through the 5% buyback to burn structure.
This burn feature is implemented to offset the emission rate of $CRYSTL💎 and combat inflation, providing a solid baseline to support the positive growth for the price of the $CRYSTL💎 token. As more and more users take advantage of the high APYs offered by vaults, it’s easy to see that this would also result in burning 🔥 more and more $CRYSTL💎. For more information about the intricate relationship between emissions and the burning brought by the PolyCrystal Vaults, as well as the benefits brought by this mechanism, check out KingD’s latest article 📰.
Hopefully after all that reading, you are much more comfortable approaching the idea of using vaults! Feel free to continue your education by following our Medium and discover even more educational content. Our Gitbook is also organized to conveniently provide you with all the latest $CRYSTL💎 Clear Education.
This article was written by Light, feel free to reach out to him on Telegram for any questions, or even if you just want to chat!