The Unit Network Vault is a multi-faceted feature that allows any UNIT Token holders to borrow against their UNIT as collateral and most importantly of all, improve platform security by facilitating decentralised token wrapping.
- Facilitates wrapping of crypto (BTC / ETH / DOT etc) onto the Unit Network in a decentralised way (unlike WBTC)
- Much less sell pressure for UNIT (as people can get a loan against UNIT instead of selling it on the market)
- More UNIT locked up over time (as it will be held in Unit vaults)
- Allows anyone to receive staking rewards for wrapped crypto tokens on the Unit Network (BTCU/ ETHU / DOTU etc)
- More demand and buy pressure for UNIT, as a reserve for the vaults with no risk of being liquidated/margin called. As this way the deposit / withdraws work is to ensure that the most over collateralised vaults receive the deposits / wrapping, and the least collateralised vaults handle withdraws / unwrapping - balancing it over time.
Non-native level 1 tokens like Bitcoin must be “wrapped” to be used within the Unit Network ecosystem. Wrapping is common in blockchain today, but the native tokens that are wrapped are generally held by a single custodian and therefore subject to centralised risks. Unit Network solves this problem with decentralised wrapping:
1. A UNIT token holder creates a “vault” dedicated to wrapping a particular level 1 token – e.g. BTC – by entering a personal wallet address off the Unit Network chain and then “locking” a chosen amount of UNIT in the vault.
2. Another user then deposits a level 1 token (e.g. BTC) to Unit Network. That is:
a. the depositor is assigned a vault based on the token they wish to deposit (e.g. BTC) and sends this native token to the assigned vault-creator’s personal wallet off the Unit Network chain.
b. the vault then mints a wrapped token (e.g. BTCU) equivalent to their deposit which is then sent to their personal wallet to be used on Unit Network as desired.
Deposits to Unit Network become zero-interest loans to vaults. Just as traditional banks use the deposits of their members to issue loans / invest, vault creators can also use the borrowed level 1 tokens to earn a return.
UNIT is locked as a vault’s reserves until the vault’s loan balance is fully repaid – i.e. a withdrawal is processed.
Unit Network automatically allocates each new deposit to the vault with:
(1) the highest reserve ratio (current UNIT/Loan value), and, if tied,
(2) the most UNIT.
Withdrawals from the Unit chain pay a 1% fee, split equally between the UNIT treasury (0.5%) and the vault that processes the withdrawal (0.5%). Requests go into a queue, and vaults compete to process withdrawals and earn fees.
Today, banking is centralised. For decades, bank depositors ignored bank safety and relied on inflationary government deposit insurance to protect their funds, resulting in extremely low reserve ratios set by fiat and a rickety banking system prone to collapse. In a free market, bank depositors care about banks’ reserves, and banks compete for customer deposits by demonstrating prudent reserve management and safety. On Unit Network, decentralised vaults wrap deflationary digital stores of value onto Unit Network and into UNIT’s treasury, making UNIT the pristine reserve asset of the world’s de-central bank.
Let's say you have 1000 UNIT in your wallet and you create a vault with this 1000 UNIT. UNIT has a current price / value of $2 so the total collateral value of 1000 UNIT is $2000.
Unit Network then gives you a loan for 2 SOL ($250) - which was a user depositing SOL onto the Unit Network to become SOLU - so you can now stake, spend or sell this 2 SOL.
Your 1000 UNIT is now locked / frozen until you either pay back the 2 SOLU ($250) or handle a withdrawal of 2 SOL at which point the 1000 UNIT will be credited back to your wallet while also crediting you with 0.5% ($1.25) for handling the withdrawal.
Question - why would someone lend money to someone with UNIT as collateral?
As they want and need to wrap their tokens in order to partake in the token economy, and the vaults allow them to do it in a decentralised way.
Question - what are the risks involved in creating a vault?
Minimal risk due to not having to worry about margin calls (unlike borrowing on Celsius / Nexo etc). As even if the value of your UNIT drops, you still only have to pay back the original loan and your UNIT will be immediately returned to your wallet.
Question - How does one measure the “riskiness” of a VAULT if all vault reserves are in UNIT?
Based on (in order of priority) :
1) ratio of UNIT in vault to loan amount taken by vault
2) amount of UNIT in vault
So even if:
Vault A has 100,000 UNIT - with 0.5 BTC loan
Vault B has 20,000 UNIT - with no BTC loan, Vault B is less risky, as it has no loan against it.
Question - When I lock up UNIT as collateral and it increases in price, will I be able to borrow more BTC?
Yes. Although the borrowing happens automatically, including the amounts that you borrow. You are just adding UNIT to your BTC vault, and the UNIT network will decide how much of a loan you get as reward for your participation in the decentralised wrapping process.
Question - What happens if it decreases in price again - will I then have an under-collateralised loan?
Yes. Although this is highly unlikely to be the case as the loan given will be a fraction of the UNIT reserves locked up, noting again that only the least risky vaults on the network are given loans in the first place.
However, in the event that the UNIT reserves do become worth less than the loan, instead of it being dumped onto the market/liquidated like a missed margin call for a leveraged trader (which has the effect of further depressing the price/causing a downward spiral). It is effectively stays locked up/removed from the circulating supply until it makes sense for the borrower to pay back the loan.
Question - How much can I under-collateralise until the network will not give me loans anymore?
If you are under-collateralised, or anywhere close to it. The Unit Network will not give you a loan, as you become a more more risky vault relative to the others on the network.