Vaults, Simplifying and Optimizing Your Phala Delegations
We know choosing a StakePool hasn’t always been the easiest process for delegators. To address this issue, we are introducing Vaults, a simple way to maximize your staking yield.
What are Vaults?
If you’re a DeFi OG, you will be well acquainted with the concept of vaults. For newcomers, vaults are pools of funds with an associated strategy that aim to maximize returns on the assets they hold. Phala’s Vaults will operate along these guidelines, while also simplifying the delegation process by minimizing the amount of analysis delegators need to do to maximize their yield. This makes it one of the most anticipated and important features of PhalaApp 2.0.
Phala App v2 — Delegate — Vault page
Why are Vaults Necessary?
‘Delegating’ refers to the process of contributing tokens to a public validator node. In Phala Network, delegating is referred to as ‘stake to earn’, whereby delegators receive incentives from the rewards of active workers.
StakePools, which are overseen by pool operators, enable users to pool their tokens to increase their chances of earning block rewards. However, for novice delegators, it is often difficult to identify high-quality StakePools, as this process is dependent upon utilizing complex indicators such as creation time, past performance, APR, etc.
The ‘quality’ of a StakePool can be determined by its performance in rewarding its delegators on a consistent basis. Therefore, if delegators unknowingly select a ‘bad’ StakePool, they’re at risk of receiving decreased rewards or no rewards. Minimizing the probability of this occurring is crucial to maintaining community confidence and avoiding risks of network instability.
Vaults increase the probability of high-performance workers being chosen as experienced agents are incentivised to assist with the process of StakePool selection.
How do Vaults Work?
The above image illustrates how our delegation system operates with the introduction of Vaults. PHA holders will be able to delegate into either a StakePool or a Vault, taking into account the following:
- Vault owners select and delegate the Vault’s PHA to ‘high-quality’ StakePools;
- A Vault owner’s reward is based upon the commission share (set by Vault owner) of all delegation rewards accrued by the Vault;
- To the StakePool, there is no difference between delegations from common delegators or Vaults;
- A Vault cannot delegate to other Vaults.
- Vault Delegation NFTization
In our previous article, we highlighted that delegated PHA is tokenized in the form of an NFT that can be redeemed to retrieve a user’s delegated PHA balance. With the introduction of Vaults, there will now be two categories of delegation NFTs: a Proof of Delegation NFT (Vault NFT) representing delegation to a Vault, and a Certificate of StakePool Delegation NFT representing delegation directly to a StakePool.
Proof of Vault NFTs will be displayed in the user’s vault information as well as in the ‘my vault’ page. In the future, Vault NFTs will be transferable and able to be sold in the PhalaWorld marketplace. This will allow delegators to trade in and out of Vault positions without any PHA being unstaked from StakePools. StakePool NFTs on the other hand will continue to be non-transferable.
Vault NFTs preview
- Vault Creation
Any user can create a Vault, which involves generating a new Vault account of which they become the owner. Vault owners set the commission rate and manage the delegation of funds within their Vault.
- Vault owners can only delegate and withdraw PHA between StakePools and their Vault
Vault owners only have the permission to move PHA in and out of StakePools. Therefore, Vault owners can NEVER transfer your tokens to an external account. This prevents your assets being permanently locked or tampered with.
For Vault users, please ensure that you never transfer your assets to Vault account, only delegate them.
- Maximum withdrawal periods for Vault is 21 days
As Vaults are derivatives of StakePool delegations, withdrawals from Vaults are already subject to the maximum StakePool withdrawal period of 14 days. For Vaults, we’ve extended this withdrawal period by a week to allow for asset turnover within the Vault, making the maximum withdrawal period 21 days.
- ‘APY’ is used in the Vault rewards instead of ‘APR’
- Individual StakePool rewards can only increase with the addition of new workers.
- Vault owners have the ability to freely transfer delegations among different StakePools.
- The interest in the Vault delegation is compounded.
All rewards earned by Vaults are from StakePool delegations. However, we use ‘APY’ to evaluate the interest accrual in the Vault rather than ‘APR’ which is used in StakePools.
This was decided for the following reasons:
StakePool rewards are derived from workers, and each worker can only earn a finite amount of income regardless of how much the delegation amount in the StakePool increases. Additional rewards can be earned only when the StakePool owner adds new workers.
A Vault’s delegation rewards are derived from the StakePools it delegates to. If a certain StakePool is producing its maximum reward and doesn’t add more workers, the Vault owner can begin delegating to a new StakePool to continue increasing the rewards that Vault earns.
All delegation rewards in the Vault will remain in StakePools and will be compounded if they’re not withdrawn.
- Vault Rewards
Like StakePools, Vault owners will receive a commission based on the total Vault delegation rewards. The commission value is set and manually executed by the Vault owner. After each execution, the rewards earned from the last two executions will be used as the base to draw commissions for the pool owner.
A delegator’s reward will be distributed according to their share of the amount of PHA in each pool. We will provide additional details on delegator rewards at a later date.
Who Should Become a Vault Owner?
Successful Vault owners will be experienced members of the Phala community who are very familiar with managing StakePool delegations. Vault owners should be willing to commit significant time and effort to managing their Vault, which includes coordinating with StakePool owners and delegators, developing a delegation strategy, and onboarding newcomers. Vault ownership can be a very profitable activity, and it follows that the more you put into managing your Vault, the more you will get out of it.
For Delegators, we recommend evaluating Vaults based on their TVL and overall stability, which will be more important in the long run than the APY.