modules

While the Signal Vault is the brain of the system, the Asset Vault is the muscle. Its purpose is to manage the Vault capital according to the aggregated market intelligence of the Signal Vault and to ensure economic sustainability.

Anyone can buy or sell the Vault's base asset (e.g. ETH) for the Vault's quote asset (e.g. USDC) at the most recent settlement price. This transaction is unidirectional per epoch, i.e. only buy or only sell, determined by the Signal Vault.

Arbitragers ensure that the Asset Vault is positioned in the desired direction since they can buy/sell the base asset at a fixed price and instantly resell it on the open market for a small profit.

Anyone can redeem (sell) PSM in the Asset Vault for a share of the Vault's current assets.

The ratio of this redeeming process is proportional. For example, if the redeem base amount of the Vault is 1 billion PSM, one could redeem 100M PSM for 10% of the Vault's holdings of a specific token (e.g. USDC).

The PSM acquired in this process is redirected to the Signal Vault and refills the available epoch rewards for stakers.

To avoid a complete draining of the Vault – which would bring the system to a permanent halt - there is a redeem limit per transaction as per contract specification. For example, if the redeem base amount is 1Bn, the redeem limit could be 500M PSM. In this case, only 50% of the Vault's assets could be redeemed in a single transaction, leading to exponential decay, but the Vault balance can never reach zero. (500M = 50%, 1Bn = 25%, 1.5Bn = 12.5%, etc.)

This mechanism ensures that the Vault can perpetually generate trading returns which drive PSM redemptions, which refill staking rewards of the Signal Vault.

When exactly does the system achieve financial sustainability? We can calculate the breakeven point given a set of assumptions in an ideal financial model:

All PSM rewards get sold immediately

The market price of PSM is always equal to the floor price

The epoch reward of the deployed WETH/USDC vault is 2 million PSM per week, i.e. 104 million per year. Think of this as "issuance". To balance this, a PSM sink exists in the form of redemptions. The redeem base is 1 billion PSM, meaning that 1 billion PSM equals 100% of the Vault's assets. The Sustainability Hurdle Rate is a simple ratio of PSM issuance vs. PSM sink by the protocol.

hurdleRate = annualRewards / redeemBase

hurdleRate = 104 / 1000 = 10.4%