1. What are the Vaults?
The Unit.Network vault is a multi-faceted feature that allows UNIT holders to facilitate (1) decentralized token wrapping and (2) decentralized banking.
2. What is decentralized token wrapping?
Level 1 tokens must be “wrapped” onto Unit Network to be employed in the Token Economy. Wrapping is common in blockchain today, but native tokens are generally held by a custodian subject to centralized risks.
Unit solves this problem with decentralized wrapping:
1. A UNIT token holder creates a “vault” dedicated to wrapping a particular level 1 token — e.g., BTC — and “locks” a chosen amount of UNIT in the vault.
2. A user deposits a level 1 token to Unit Network. That is,
a. the depositor is assigned a vault and sends a native token to the assigned vault-creator’s personal wallet off the Unit chain, and
b. the vault mints a wrapped token (e.g., BTCU) to the depositor’s personal wallet to be used on the Unit chain.
3. What is decentralized banking?
Deposits are zero-interest loans to vaults, like bank deposits, and vault creators, like banks, can invest borrowed funds 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.
4. What’s so revolutionary about decentralized banking?
Today, banking is centralized. 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, decentralized vaults wrap deflationary digital stores of value onto Unit Network for use in the token economy, making UNIT the pristine reserve asset of the world’s decentral bank.
5. How are withdrawals handled?
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. Any vault can process a withdrawal/unwrapping.
6. What are some benefits of the Vaults?
Facilitates wrapping of crypto (BTC/ETH/DOT, etc.) onto the Unit Network in a decentralized 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 high reserve vaults receive the deposits/wrapping, and the low-reserve vaults handle withdraws / unwrapping — balancing it over time.
7. Is the reserve/loan amount already known?
No specific reserves-to-loan ratio is prescribed, as the Unit Network is ensuring at all times that the underlying funds are distributed in the least risky distribution. Will depend on the price of UNIT, distribution of UNIT across vaults, the price of underlying unwrapped assets, and other market conditions.
8. How much do vaults have to pay to borrow? What is the vault apr?
APR is the cost to borrow funds. There is no interest or cost to borrow from the vaults, as the vaults are delivering value to the network for being the decentralized custody of the underlying digital reserve assets.
9. Will there be any arbitrage opportunities with the vaults?
Not specifically, though there are lots of arbitrage opportunities with the exchange pools.
10. What are some scenarios for how deposits are distributed to vaults?
10 BTC deposit will go to vault A as the least risky.
15k UNIT/BTC ratio
10 BTC deposit will go to vault B as the least risky.
15k UNIT/BTC ratio
20k UNIT/BTC ratio
1 BTC deposit will go to vault C as the least risky.
11. What’s an example of how a withdrawal works?
Say I wanted to withdraw 100 BTCU to receive 99 BTC due to 1% withdrawal fee (1BTC).
99.5 BTCU goes to the person who is sending me 99 BTC, and 0.5 BTCU goes to UNIT Treasury.
100 BTCU being unwrapped/withdrawn
0.5 BTCU to UNIT Treasury
0.5 BTCU to user processing withdraw
99 BTCU to user processing withdraw
I withdraw 100 BTCU, receive 99 BTC
User sends me 99 BTC, receives 99.5 BTCU
UNIT Treasury gets 0.5 BTCU
12. Why would someone lend money to someone with UNIT as reserve?
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 decentralized way.
13. 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.
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.
14. When I lock up UNIT as reserves 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 a reward for your participation in the decentralized wrapping process.
15. What happens if it decreases in price again — will I then have an under-reserved 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 effectively stays locked up/removed from the circulating supply until it makes sense for the borrower to pay back the loan.
16. How much can I under-reserve until the network will not give me loans anymore?
If you are under-reserved, or anywhere close to it, the Unit Network will not give you a loan, as you become a more risky vault relative to the others on the network.
Any other questions do you want answered — Ask them on Unit’s Telegram Channel.
Unit is a community of changemakers building powerful, secure and user-friendly tools that promise to give rise to generations of self-sustainable individuals. To be part of it, do your own research, manage risk appropriately and consult the laws of your home country about cryptocurrencies. Share your experience and learnings with us: use the hashtag #unitnetwork so we can find you.