IV. The M0 Economy
High-level description of the M0 economy.
The M0 protocol is a coordination mechanism. It is not intended to replace existing financial actors, but rather to provide novel and more efficient means by which they can interact. We believe that a universal blockchain-based protocol, where rules and transparency are enforced by code, is superior to the feudal and opaque landscape of value transmission present today.
The M0 Protocol is intended to coordinate Minters, validators, and Earners. It is anticipated that offchain this may correspond to financial services providers (such as stablecoin issuers), auditors, and institutional holders of $M.
IV.I Minters
What are Minters in the context of M0?
Minters are primarily incentivized to join the protocol because they want to earn the spread between the yield (net of expenses) on their Eligible Collateral and the protocol’s Minter Rate. In addition, the Mint Ratio will determine the attractiveness of Minting relative to the yield spread.
The effective ROC (return on capital) of a Minter is net yield generated on the Eligible Collateral, divided by the net cash investment, which is the capital invested into Eligible Collateral, minus their Owed $M (assuming they were able to sell this $M at $1) plus the Administrative Buffer.
It is anticipated that Minters in the M0 protocol will correspond to financial services providers (such as stablecoin issuers) offchain. The ultimate function of the Minter is the generation and management of the supply of $M.
Considering the initial Eligible Collateral is intended to be short term T-bills, it is assumed that the Minter Rate will need to be less than the US Federal Funds rate. See the diagram below for a visual example of the basic Minter economics.
It is also anticipated that Minters will engage in arbitrage. If $M is trading above $1 on secondary markets, it is logical for Minters to deposit Eligible Collateral in order to generate more M. This will boost their net yield. Conversely, if $M is trading below $1 on secondary markets, it is logical for Minters to repurchase $M and to use it to Retrieve Eligible Collateral. This will also boost their net yield. It is for this reason that $M is expected to trade with some volatility around (US) $1 – the mechanism relies on sometimes inefficient and unpredictable market forces to achieve an average price of $1 over the long term.
There will be no built in mechanism at the protocol level to ensure the price stability of $M; rather, that will be achieved via the economic incentives described and visualized above.
IV.II Validators
What are validators in the context of M0?
Economically, all validators must be incentivized offchain or use periphery smart contracts. There is no Validator compensation in the core protocol. This decision was made because the Validator landscape is complex and the chance of accurately encapsulating these complex economic arrangements onchain was nil.
For the basic function of providing signatures for Update Collateral, it is expected that validators and Minters will enter into binding, offchain legal agreements specifying applicable terms and appropriate compensation. It is anticipated that validators in the M0 protocol will eventually correspond to auditors offchain. The ultimate function of the Validator is to provide as close to real time attestation of the Eligible Collateral being used to generate $M as possible.
While the protocol considers all Validator addresses to be fungible, there are in fact many specializations that could occur offchain in the Validator ecosystem. For instance, there may be validators that specialize in signing off on onchain Collateral Value updates, while others act as “sentinels” and exclusively exist to call Cancel and Freeze on errant Minters. The level of specialization could even go beyond the initial methods of the protocol as Periphery Contracts are added by the ecosystem.
IV.III Earners
What are Earners in the context of M0?
Earners are simply addresses approved by the TTG to earn the Earner Rate. It is expected that, throughout the cycle, the Earner Rate will remain comparable to the US Federal Funds rate as well in order to entice Earners to continue to hold $M.
The Earner Rate can be used as an additional tool to encourage $M price stability around $1. If the price of $M is above $1, the TTG can lower the Earner Rate in order to discourage holding of $M and to encourage selling of $M for alternative sources of yield. If the price of $M is below $1, the TTG can raise the Earner Rate in order to encourage the holding and purchase of $M. It should be noted that the Earner Rate can be higher than the Minter Rate as long as the amount of $M being paid out via the Earner Rate is less than the amount of total $M generated from Minter Rate.
It is anticipated that Earners in the M0 protocol will correspond to institutional holders of $M offchain, and to issuers and distributors that maintain $M inventory. The ultimate function of Earners is as a source of demand for $M, making it more likely that Minters can efficiently generate $M. This is effectively to say that Earners align nicely with the ultimate distributors of $M to the broader market.
