All accepted collateral assets can be leveraged to generate H2O in the Defrost Finance Protocol through smart contracts called Defrost Vaults. Users can access the Defrost Finance Protocol and create Vaults through the Defrost Finance interface.
Vaults are categorized by the type of collateral used to generated H2O. Users create H2O by generating it against their collateral and burn H2O when repaying their generated H2O balance. The process of generating H2O happens entirely on-chain, which enables anyone to audit the amount of circulating H2O and the collateral backing it.
Vaults are inherently non-custodial. Users interact with Vaults and the Defrost Finance Protocol directly, and each user has complete and independent control over their deposited collateral as long as that the value of that collateral doesn’t fall below the required minimum level (the Minimum Collateral Ratio).
When users deposit LP tokens into the Defrost contract and mint H2O, the vault will record the collateral deposited, H2O borrowed, and collateral ratio.
If a Vault becomes undercollateralized, as specified by each Vault type’s Minimum Collateral Ratio, it can be liquidated and have its assets automatically sold to cover the generated H2O as well as the Stability Fee. If a Vault is liquidated, a Liquidation Penalty is applied to the generated H2O balance.
The Stability Fee and Liquidation Penalty vary according to the Vault type.
- Creating and Collateralizing a VaultA user creates a Vault via the Defrost Finance portal by powering it with a specific type and amount of collateral, like the LP tokens, that will be used to generate H2O. Once funded, a Vault is considered collateralized.
- Minting H2O from the Collateralized VaultThe user can generate a specific amount of H2O in exchange for keeping his/her collateral locked in the Vault, provided that it is within the collateral limit.
- Repaying the DebtTo retrieve a portion or all of the collateral, the user must partly or completely repay the H2O minted, plus the Stability Fee that continuously accrues on the debt outstanding. The Stability Fee can only be paid in H2O.
- Withdrawing CollateralWith the H2O returned, burnt and the Stability Fee paid, the Vault owner can withdraw some or all of the collateral back. If all H2O is completely returned and all collateral is retrieved, the Vault remains empty until he/she chooses to make another deposit.
The minimum H2O minting amount is 200.