DeFiChain Advanced Tutorial

Part of a series on DeFiChain Tutorials

In the previous tutorial, we went over staking and liquidity mining and how you can get cashflow by using these investment methods. In this tutorial, we will be going in depth about vaults and auctions, which are two new features in DeFiChain.

Collateral for Vaults

A new feature that was recently introduced to DeFiChain is the ability to create a vault from which you can take out a loan and mint new tokens. A vault is similar to a bank, but it is decentralized and anyone can make their own. Users may deposit DFI, dBTC, DUSD, dUSDT, and dUSDC to their vault, and 50% of the vault must be collateralized with DFI. Depending on which option a borrower chose for their vault, they can take out between $10.00 (for a vault that has a ratio of 1,000%, or $1 in loans for every $10 in collateral) to $66.66 (a vault with a ratio of 150%, or $6.66 in loans for every $10) in loans for every $100 of collateral. If the ratio of the vault falls below the ratio they chose, their vault is automatically sent to be liquidated, and people bid to take the collateral from the vault (there is more information in the section below).

Users can take out DUSD stablecoins, or various stock tokens and ETF tokens. This allows an investor to go short on a token; as the value of the borrowed token decreases, the less money needed to pay back the loan. You also could leverage any crypto positions you have with the extra borrowed money.

Advantages

• Hedging against stocks
• Leveraging crypto positions
• Increasing supply of borrowed token (when you "borrow a token," you are actually minting new tokens, increasing the supply, which is good for DeFiChain)

Disadvantages

• Risk of liquidation
• Interest must be paid on borrowed tokens

Bidding on Liquidated Vaults

Occasionally investors default in their vaults as there may be a sudden swift drop in prices, resulting in a vault to have too low of a collateralization ratio. Although users are protected from a 30% swing in prices in an hour, as vaults are halted during this time to allow users to deposit additional collateral, vaults may simply fall below the collateralization ratio. Since there is no "liquidation engine" or such, DeFiChain must think of a way to liquidate these investors' vaults.

Vaults are liquidated by the community. An auction with a six-hour time limit is held for every liquidated vault, with a minimum bid amount decided by the system. Users bid in the borrowed token, and in exchange receive the collateral inside the vault if they win. The vault owner receives the winning bid, minus a 5% fee, which is burned. (verify)