Synthetix V3 Vaults: An Explainer

Vaults are a fundamental component of the Synthetix V3 ecosystem, serving as the primary entry point for liquidity providers.

Synthetix

Nov 8, 2023 • 3 min read

Introduction

Vaults are a fundamental component of the Synthetix V3 ecosystem, serving as the primary entry point for liquidity providers. They allow users to deposit and delegate collateral to pools, which use this collateral to provide liquidity to derivative markets. This article delves into the intricacies of how vaults function within Synthetix V3.

The Role of Vaults in Synthetix V3

Users can deposit their collateral into governance-approved vaults and delegate this collateral to pools. Pools generate sUSD against this collateral and use it to provide liquidity to markets. This ensures that derivative markets like Synthetix Perps have ample liquidity to support trading activities. Additionally, the vaults offer users the option to deposit collateral and borrow sUSD, without exposure to active markets.

Liquidity providers can earn rewards from trading fees by delegating collateral to well-designed markets with appropriate fee structures. This incentive encourages more liquidity providers to participate in the market.

Pools and Vaults

Every pool has one vault for each collateral type. The owner of each pool will set the approved collateral types. Keeping the collateral in pools separated into vaults has the following implications:

When a liquidity position is liquidated, its collateral and debt are distributed pro-rata across the other liquidity positions of the same collateral type in the pool (i.e. of the other positions in the vault), not across all positions in the pool.
Entire vaults may be liquidated.
Pool owners can attach rewards distributors to vaults, allowing them to incentivize liquidity of particular types to be added to their pools.

Collateral Types, Risk Parameters, Supply Caps, and Governance

The Synthetix Spartan Council holds the authority to adjust the following collateral risk variables by voting on community-presented Synthetix Improvement Proposals (SIP) or SCCPs:

Accepted Collateral Types: Governance can approve any ERC-20 token with a price feed as vault-approved collateral.
Risk Parameters: The Spartan Council has the power to modify the risk parameters associated with each collateral type. These include but are not limited to the following:
1. Issuance Ratio: Liquidity providers are restricted in minting snxUSD tokens below the issuance ratio set for the collateral. Example: An issuance ratio of 150% for ETH means a user can mint 1 sUSD for every $1.5 in ETH
2. Liquidation Ratio: If the collateralization ratio of a specific liquidity position falls below the liquidation collateralization ratio for its corresponding collateral type, the position may be liquidated. The council can determine the liquidation collateralization ratio for each collateral type. Example: Liquidation ratio of 120% for ETH

Account Permissions in Vaults

Accounts in Synthetix V3 can delegate permissions to addresses other than the owner. This feature is useful for improving security or for collaboratively managing liquidity positions. The different types of permissions include:

ADMIN: Admins have permission to do everything that the account owner can (including granting and revoking permissions for other addresses) except for transferring account ownership.
WITHDRAW: Addresses with this permission may call the `withdraw` function on behalf of the account.
REWARDS: Addresses with this permission may call the `claimRewards` function on behalf of the account.
MINT: Addresses with this permission may call the `mintUSD` function on behalf of the account.
DELEGATE: Addresses with this permission may call the `delegateCollateral` function on behalf of the account.

Note that there are no permissions for `DEPOSIT` or `BURN`. These are permissionless operations, which can be performed by anyone on any liquidity position because they improve the position's health.