How Vesto Works

Vesto operates as a sophisticated derivatives protocol that enables the creation of synthetic assets backed by diversified token baskets while simultaneously generating yield. This page explains the protocol's inner workings, from token issuance to redemption.

Core Mechanisms

1. Derivative Creation

When users interact with Vesto pools, they can create derivative tokens through two primary methods:

Multi-Asset Issuance

• Users provide the exact proportions of all collateral tokens required by the pool
• The protocol calculates the appropriate amount of each token based on:
  • Current asset weights in the pool
  • Nominal units of each asset
  • Current market prices via oracle feeds
• The contributed collateral is accepted and the equivalent derivative tokens (VTokens) are minted and transferred to the user
• Mathematically, the process follows the equation: DerivativeAmount = ∑(CollateralValue_i) / PoolValue

Single-Asset Issuance

• For enhanced convenience, users can provide a single supported token (e.g. WETH)
• The protocol automatically:
  • Values the contributed token via oracle
  • Swaps portions of the token for other required collateral assets using integrated DEX functionality
  • Distributes the resulting tokens across the required pool assets according to target weights
• This enables a seamless entry point without requiring users to acquire multiple tokens beforehand

2. Collateral Management

Once collateral is provided to the pool, Vesto employs a yield-generating strategy to maximize returns:

• The VestoStrategy contract manages all collateral assets
• Tokens are tracked using a shares-based accounting system, where:
  • Each user's deposit is represented as shares in the strategy
  • The share price increases as yield accumulates
• Collateral deployment follows a prioritized approach:
  • Currently, tokens are deployed to Aave lending markets
  • The protocol maintains a balance between deployed and idle assets based on liquidity needs
  • Assets in Aave earn interest according to market rates for each specific token Note: Tokens that are not supplied to Aave remain in the contract but do not generate yield. Future versions will add support for more protocols to enable yield generation.

No yield generation strategy should pose any risk of loss to users, as Vesto's primary focus is to create a derivatives market that exposes users to price variations of multiple tokens while requiring only one. The yield received is a bonus; therefore, there are no leverage strategies or anything related. In a future version, new functionalities will be integrated, allowing users to earn yield by providing liquidity within Vesto without relying on external protocols.

3. Yield Accrual

The yield generation process is fully automated and benefits all pool participants:

• Interest from lending activities accrues in real-time
• The protocol tracks yield at the strategy level, where:
  • aTokens from Aave accumulate value representing the original deposit plus interest
  • The pool's total assets increase over time while the number of derivative tokens remains constant
  • This results in each derivative token being backed by an increasing amount of value
• Yield distribution is implicit through the increased redemption value of derivative tokens
• The accounting system ensures fair distribution based on the duration and amount of user participation

4. Derivative Redemption

Users can exit their position at any time through a redemption process:

• When a user redeems their derivative tokens:

  • The protocol burns the VTokens
  • Calculates the proportional claim on the underlying assets including accrued yield
  • Withdraws the required assets from lending protocols if necessary
  • Transfers the appropriate amount of each collateral token to the user

• A small redemption fee (currently 0.5%) is applied and directed to the fee recipient

• Users receive their share of:

  • Original collateral proportional to their ownership
  • Accrued yield proportional to their ownership and duration of participation

5. Fees

The fees charged by the protocol will be detailed before its launch. These fees will be used for ecosystem maintenance, with a portion allocated to governance and another portion distributed to $VESTO stakeholders (the governance token of 0xVesto).