Vaults

A vault in the Xylem Protocol is a secure digital mechanism where users lock up their Bitcoin (BTC) as collateral to mint USDx, a Bitcoin-native stablecoin. These vaults are the backbone of the system—where BTC gets “parked” to create new value while ensuring everything stays over-collateralized and secure.

How Vaults Work

When a user wants to mint USDx, they deposit BTC into a vault. This process follows strict protocol rules:

1. The system checks if the user has enough BTC
2. The current BTC/USD price is verified through oracles
3. All conditions must be met, particularly staying above the 130% minimum collateralization ratio

For example, if you lock $10,000 in BTC, you can mint up to 6,250 USDx.

Key Functions

The vault has two critical functions:

1. User Control: The user can update the vault—adding more BTC, borrowing more USDx, repaying debt, or withdrawing BTC (as long as the vault remains safe).

2. Liquidation Mechanism: If BTC’s value drops and the collateralization ratio falls below the 105% liquidation threshold, the vault can be liquidated to protect the system. This ensures USDx is always backed by real BTC, even in volatile markets.

Technical Implementation

The vault creation process happens in two linked transactions:

• First transaction: The user receives their USDx tokens while their BTC is held as collateral
• Second transaction: The BTC moves into a vault, which creates a record of the vault’s creation

The vault storing the BTC can be accessed in two ways:

• When the user updates their vault through any of the authorized validators
• When the vault’s validators and oracle liquidate the vault if the collateral value drops to the Liquidation Threshold

All changes to the vault are recorded to track the user’s borrowing activity and collateral levels. The system references the minimum collateralization Canonical Reference Point to determine the amount of USDx that an individual vault can mint:

Maximum USDx = (BTC Collateral * BTC/USD Price) / (Minimum Collateralization Ratio)

Where Minimum Collateralization Ratio = 130%. The MCR is a key risk parameter defined in the Governance CRS, and is subject to governance and therefore change.

Importantly, the user always retains partial control, and the validators simply ensure the protocol’s rules are enforced—they never have unilateral control over your BTC.