Pencilsprotocol funded legacy deposit rewards with interest from vault borrowing

Who Received the Interest From Legacy Vault Loans?

Depositors received income from borrower interest through the Staking deposit pool during the legacy platform’s operating period. Vault borrowing carried a financing cost, and the pool used that interest to reward the people supplying its liquidity.

Borrowed principal supplied capital for the leveraged position; interest paid for the use of that capital. A loan balance therefore described financing, not the income that depositors earned.

Borrowed Capital Inside Vaults 1.0

The Vaults 1.0 design linked the vault pool to a decentralized exchange, or DEX, liquidity pool on Scroll. Users selected liquidity-provider (LP) tokens and a leverage multiple for their positions. The vault contract automatically sourced the required leverage funding from the Staking deposit pool. The DEX pool supplied the setting for liquidity deployment, while the deposit pool supplied financing.

The DEX pool issued LP tokens after receiving assets for the liquidity position. The vault staked those LP tokens to earn rewards.

How Did Pool Utilization Affect Deposit APR?

The legacy deposit APR model increased rates when borrowers used a larger share of the deposit pool’s funds. When borrowing demand weakened and more funds remained available, the model reduced rates. This floating-rate design linked deposit returns to liquidity demand within the pool.

Utilization described the proportion of pool funds that borrowers used. It differed from a vault’s leverage multiple, which described the scale of a position relative to its own capital. A large individual position did not reveal how much liquidity remained across the pool.

Low utilization lowered deposit APR while the pool operated. The later cessation of active yields represented a different state: the platform had ended active earnings on deposited funds.

An annualized APR did not lock the same rate in place for a year.

Loan Costs Within LP Returns

Liquidity rewards arose on the leveraged LP side, while loan interest supported the deposit pool that financed it. Gross LP rewards and borrowing costs therefore needed separate treatment when interpreting a vault return. A rewards figure alone did not establish how much remained after interest expenses. Likewise, the deposit APR described earnings on supplied funds, not the full performance of the financed LP position.

Comparing income with financing costs required the relevant balances and the same measurement period. A reward percentage on one balance and an interest percentage on another balance could not simply cancel each other. Amounts also needed a common unit of value before they could produce a meaningful net figure. Leverage expanded the financed position, making the borrowing balance part of the return calculation.

Principal Checks and Leverage Limits

Principal assessments and leverage limits formed the vault design’s stated approach to controlling exposure to borrowed funds. Evaluating the borrower’s own capital addressed the support behind a leveraged position, while limiting leverage constrained its permitted scale. These controls aimed to protect deposited funds. A leverage cap limited a position’s size relative to the borrower’s own capital; its presence alone did not establish protection against every source of loss. The deposit APR also did not measure the strength of those controls.

Deposit Interest and Incentive Changes

Legacy participation combined interest income with additional reward categories, including Pencils points and Scroll-related incentives during eligible periods. Community points had their own program conditions and did not measure interest that borrowers paid into the pool. Token rewards likewise represented separate incentives. Combining those categories under a single reward label could obscure which component depended on borrowing demand and which depended on a campaign or program.

The project declined participation in Scroll Session 2, so Pencils Farming deposits did not earn Marks from that session. Active earnings on deposits ended later during the wind-down.

What Changed When Active Deposit Yields Ended?

Active deposit earnings ended as the wind-down shifted remaining funds toward withdrawal or return to originating wallets. The announced deadline for legacy fund withdrawals was May 31, 2025. During the transition to Dapylon, automatic returns began while manual withdrawals remained available at that stage. The project subsequently reported that users had withdrawn all assets or received returns to their originating wallets.

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The legacy interest model explained past income entries. Its utilization rule applied while that borrowing pool operated. A successor strategy’s deposit returns would depend on its own funding mechanism and rate model.